[House Report 116-161]
[From the U.S. Government Publishing Office]
116th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 116-161
_______________________________________________________________________
PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND
EQUALITY ACT OF 2019
----------
R E P O R T
OF THE
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
on
H.R. 3299
[Including cost estimate of the Congressional Budget Office]
together with
MINORITY VIEWS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
July 18, 2019.--Ordered to be printed
PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND
EQUALITY ACT OF 2019
116th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 116-161
_______________________________________________________________________
PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND
EQUALITY ACT OF 2019
__________
R E P O R T
OF THE
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
on
H.R. 3299
[Including cost estimate of the Congressional Budget Office]
together with
MINORITY VIEWS
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
July 18, 2019.--Ordered to be printed
________
U.S. GOVERNMENT PUBLISHING OFFICE
37-115 WASHINGTON : 2019
C O N T E N T S
Page
I. SUMMARY AND BACKGROUND........................................ 7
A. Purpose and Summary....................................... 7
B. Background and Need for Legislation....................... 8
C. Legislative History....................................... 8
II. EXPLANATION OF THE BILL...................................... 9
A. Extension of period of limitation for certain legally
married couples (sec. 2 of the bill and sec. 6511 of the
Code)...................................................... 9
B. Rules relating to all legally married couples, and rules
relating to the gender of spouses, etc. (secs. 3 and 4 of
the bill).................................................. 11
III. VOTES OF THE COMMITTEE...................................... 12
IV. BUDGET EFFECTS OF THE BILL................................... 12
A. Committee Estimate of Budgetary Effects................... 12
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority.............................. 14
C. Cost Estimate Prepared by the Congressional Budget Office. 14
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE.... 15
A. Committee Oversight Findings and Recommendations.......... 15
B. Statement of General Performance Goals and Objectives..... 16
C. Information Relating to Unfunded Mandates................. 16
D. Applicability of House Rule XXI, Clause 5(b).............. 16
E. Tax Complexity Analysis................................... 16
F. Congressional Earmarks, Limited Tax Benefits, and Limited
Tariff Benefits............................................ 16
G. Duplication of Federal Programs........................... 17
H. Hearings.................................................. 17
VI. CHANGES IN EXISTING LAW MADE BY THE BILL..................... 17
A. Changes in Existing Law Proposed by the Bill.............. 17
VII. MINORITY VIEWS.............................................. 588
116th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 116-161
======================================================================
PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND EQUALITY ACT OF 2019
_______
July 18, 2019.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Neal, from the Committee on Ways and Means, submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 3299]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 3299) to permit legally married same-sex couples to
amend their filing status for income tax returns outside the
statute of limitations, to amend the Internal Revenue Code of
1986 to clarify that all provisions shall apply to legally
married same-sex couples in the same manner as other married
couples, and for other purposes, having considered the same,
report favorably thereon with an amendment and recommend that
the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Promoting Respect for Individuals'
Dignity and Equality Act of 2019'' or as the ``PRIDE Act of 2019''.
SEC. 2. EXTENSION OF PERIOD OF LIMITATION FOR CERTAIN LEGALLY MARRIED
COUPLES.
(a) In General.--In the case of an individual first treated as
married for purposes of the Internal Revenue Code of 1986 by the
application of the holdings of Revenue Ruling 2013-17--
(1) if such individual filed a return (other than a joint
return) for a taxable year ending before September 16, 2013,
for which a joint return could have been made by the individual
and the individual's spouse but for the fact that such holdings
were not effective at the time of filing, such return shall be
treated as a separate return within the meaning of section
6013(b) of such Code and the time prescribed by section
6013(b)(2)(A) of such Code for filing a joint return after
filing a separate return shall not expire before the date
prescribed by law (including extensions) for filing the return
of tax for the taxable year that includes the date of the
enactment of this Act, and
(2) in the case of a joint return filed pursuant to paragraph
(1)--
(A) the period of limitation prescribed by section
6511(a) of such Code for any such taxable year shall be
extended until the date prescribed by law (including
extensions) for filing the return of tax for the
taxable year that includes the date of the enactment of
this Act, and
(B) section 6511(b)(2) of such Code shall not apply
to any claim of credit or refund with respect to such
return.
(b) Amendments, etc. Restricted to Change in Marital Status.--
Subsection (a) shall apply only with respect to amendments to the
return of tax, and claims for credit or refund, relating to a change in
the marital status for purposes of the Internal Revenue Code of 1986 of
the individual.
SEC. 3. RULES RELATING TO ALL LEGALLY MARRIED COUPLES.
(a) In General.--The Internal Revenue Code of 1986 is amended--
(1) in section 21(d)(2)--
(A) by striking ``himself'' in the heading and
inserting ``self''; and
(B) by striking ``any husband and wife'' and
inserting ``any married couple'';
(2) in section 22(e)(1)--
(A) by striking ``husband and wife who live'' and
inserting ``married couple who lives''; and
(B) by striking ``the taxpayer and his spouse'' and
inserting ``the taxpayer and the spouse of the
taxpayer'';
(3) in section 38(c)(6)(A), by striking ``husband or wife who
files'' and inserting ``married individual who files'';
(4) in section 42(j)(5)(C), by striking clause (i) and
inserting the following new clause:
``(i) Married couple treated as 1 partner.--
For purposes of subparagraph (B), individuals
married to one another (and their estates)
shall be treated as 1 partner.'';
(5) in section 62(b)(3)--
(A) in subparagraph (A)--
(i) by striking ``husband and wife who lived
apart'' and inserting ``married couple who
lived apart''; and
(ii) by striking ``the taxpayer and his
spouse'' and inserting ``the taxpayer and the
spouse of the taxpayer''; and
(B) in subparagraph (D), by striking ``husband and
wife'' and inserting ``married couple'';
(6) in section 121--
(A) in subsection (b)(2), by striking ``husband and
wife who make'' and inserting ``married couple who
makes''; and
(B) in subsection (d)(1), by striking ``husband and
wife make'' and inserting ``married couple makes'';
(7) in section 165(h)(4)(B), by striking ``husband and wife''
and inserting ``married couple'';
(8) in section 179(b)(4), by striking ``a husband and wife
filing'' and inserting ``individuals married to one another who
file'';
(9) in section 213(d)(8), by striking ``status as husband and
wife'' and inserting ``marital status'';
(10) in section 219(g)(4), in the matter preceding
subparagraph (A), by striking ``A husband and wife'' and
inserting ``Married individuals'';
(11) in section 274(b)(2)(B), by striking ``husband and
wife'' and inserting ``married couple'';
(12) in section 643(f), by striking ``husband and wife'' in
the second sentence and inserting ``married couple'';
(13) in section 761(f)--
(A) in paragraph (1), by striking ``husband and
wife'' and inserting ``married couple''; and
(B) in paragraph (2)(A), by striking ``husband and
wife'' and inserting ``married couple'';
(14) in section 911--
(A) in subsection (b)(2), by striking subparagraph
(C) and inserting the following new subparagraph:
``(C) Treatment of community income.--In applying
subparagraph (A) with respect to amounts received from
services performed by a married individual which are
community income under community property laws
applicable to such income, the aggregate amount which
may be excludable from the gross income of such
individual and such individual's spouse under
subsection (a)(1) for any taxable year shall equal the
amount which would be so excludable if such amounts did
not constitute community income.''; and
(B) in subsection (d)(9)(A), by striking ``where a
husband and wife each have'' and inserting ``where both
spouses have'';
(15) in section 1244(b)(2), by striking ``a husband and wife
filing'';
(16) in section 1272(a)(2)(D), by striking clause (iii) and
inserting the following new clause:
``(iii) Treatment of a married couple.--For
purposes of this subparagraph, a married couple
shall be treated as 1 person. The preceding
sentence shall not apply where the spouses
lived apart at all times during the taxable
year in which the loan is made.'';
(17) in section 1313(c)(1), by striking ``husband and wife''
and inserting ``spouses'';
(18) in section 1361(c)(1)(A)(i), by striking ``a husband and
wife'' and inserting ``a married couple'';
(19) in section 2040(b), by striking ``Certain Joint
Interests of Husband and Wife'' in the heading and inserting
``Certain Joint Interests of Married Couple'';
(20) in section 2513--
(A) by striking ``gift by husband
or wife to third party''
in the heading and inserting ``gift by
spouse to third party''; and
(B) by striking paragraph (1) of subsection (a) and
inserting the following new paragraph:
``(1) In general.--A gift made by one individual to any
person other than such individual's spouse shall, for the
purposes of this chapter, be considered as made one-half by the
individual and one-half by such individual's spouse, but only
if at the time of the gift each spouse is a citizen or resident
of the United States. This paragraph shall not apply with
respect to a gift by an individual of an interest in property
if such individual creates in the individual's spouse a general
power of appointment, as defined in section 2514(c), over such
interest. For purposes of this section, an individual shall be
considered as the spouse of another only if the individual is
married to the individual's spouse at the time of the gift and
does not remarry during the remainder of the calendar year.'';
(21) in section 2516--
(A) by striking ``Where a husband and wife enter''
and inserting the following:
``(a) In General.--Where a married couple enters''; and
(B) by adding at the end the following new
subsection:
``(b) Spouse.--For purposes of this section, if the spouses referred
to are divorced, wherever appropriate to the meaning of this section,
the term `spouse' shall read `former spouse'.'';
(22) in section 5733(d)(2), by striking ``husband or wife''
and inserting ``married individual'';
(23) in section 6013--
(A) by striking ``joint returns of
income tax by husband and
wife'' in the heading and inserting ``joint
returns of income tax by
a married couple'';
(B) in subsection (a), in the matter preceding
paragraph (1), by striking ``husband and wife'' and
inserting ``married couple'';
(C) in subsection (a)(1), by striking ``either the
husband or wife'' and inserting ``either spouse'';
(D) in subsection (a)(2)--
(i) by striking ``husband and wife'' and
inserting ``spouses''; and
(ii) by striking ``his taxable year'' and
inserting ``such spouse's taxable year'';
(E) in subsection (a)(3)--
(i) by striking ``his executor or
administrator'' and inserting ``the decedent's
executor or administrator'';
(ii) by striking ``with respect to both
himself and the decedent'' and inserting ``with
respect to both the surviving spouse and the
decedent''; and
(iii) by striking ``constitute his separate
return'' and inserting ``constitute the
survivor's separate return'';
(F) in subsection (b), by striking paragraph (1) and
inserting the following new paragraph:
``(1) In general.--Except as provided in paragraph (2), if an
individual has filed a separate return for a taxable year for
which a joint return could have been made by the individual and
the individual's spouse under subsection (a) and the time
prescribed by law for filing the return for such taxable year
has expired, such individual and such spouse may nevertheless
make a joint return for such taxable year. A joint return filed
under this subsection shall constitute the return of the
individual and the individual's spouse for such taxable year,
and all payments, credits, refunds, or other repayments made or
allowed with respect to the separate return of either spouse
for such taxable year shall be taken into account in
determining the extent to which the tax based upon the joint
return has been paid. If a joint return is made under this
subsection, any election (other than the election to file a
separate return) made by either spouse in a separate return for
such taxable year with respect to the treatment of any income,
deduction, or credit of such spouse shall not be changed in the
making of the joint return where such election would have been
irrevocable if the joint return had not been made. If a joint
return is made under this subsection after the death of either
spouse, such return with respect to the decedent can be made
only by the decedent's executor or administrator.'';
(G) in subsection (c), by striking ``husband and
wife'' and inserting ``spouses'';
(H) in subsection (d)(1), by striking ``status as
husband and wife'' and inserting ``the marital status
with respect to each other'';
(I) in subsection (d)(2), by striking ``his spouse''
and inserting ``the spouse of the individual'';
(J) in subsection (f)(2)(B), by striking ``such
individual, his spouse, and his estate shall be
determined as if he were alive'' and inserting ``such
individual, the individual's spouse, and the
individual's estate shall be determined as if the
individual were alive''; and
(K) in subsection (f)(3)--
(i) in subparagraph (A), by striking ``for
which he is entitled'' and inserting ``for
which such member is entitled''; and
(ii) in subparagraph (B), by striking ``for
which he is entitled'' and inserting ``for
which such employee is entitled'';
(24) in section 6014(b), by striking ``husband and wife'' in
the second sentence and inserting ``a married couple'';
(25) in section 6017, by striking ``husband and wife'' and
inserting ``married couple'';
(26) in section 6096(a), by striking ``of husband and wife
having'' and inserting ``reporting'';
(27) in section 6166(b)(2), by striking subparagraph (B) and
inserting the following new subparagraph:
``(B) Certain interests held by married couple.--
Stock or a partnership interest which--
``(i) is community property of a married
couple (or the income from which is community
income) under the applicable community property
law of a State, or
``(ii) is held by a married couple as joint
tenants, tenants by the entirety, or tenants in
common,
shall be treated as owned by 1 shareholder or 1
partner, as the case may be.'';
(28) in section 6212(b)(2)--
(A) by striking ``return filed by husband and wife''
and inserting ``return''; and
(B) by striking ``his last known address'' and
inserting ``the last known address of such spouse'';
(29) in section 7428(c)(2)(A), by striking ``husband and
wife'' and inserting ``married couple'';
(30) in section 7701(a)--
(A) by striking paragraph (17); and
(B) in paragraph (38), by striking ``husband and
wife'' and inserting ``married couple''; and
(31) in section 7872(f), by striking paragraph (7) and
inserting the following new paragraph:
``(7) Married couple treated as 1 person.--A married couple
shall be treated as 1 person.''.
(b) Conforming Amendments.--
(1) The table of sections for subchapter B of chapter 12 of
the Internal Revenue Code of 1986 is amended by striking the
item relating to section 2513 and inserting the following new
item:
``Sec. 2513. Gift by spouse to third party.''.
(2) The table of sections for subpart B of part II of
subchapter A of chapter 61 of such Code is amended by striking
the item relating to section 6013 and inserting the following
new item:
``Sec. 6013. Joint returns of income tax by a married couple.''.
SEC. 4. RULES RELATING TO THE GENDER OF SPOUSES, ETC.
(a) In General.--The following provisions of the Internal Revenue
Code of 1986 are each amended by striking ``his spouse'' each place it
appears and inserting ``the individual's spouse'':
(1) Subsections (a)(1) and (d) of section 1.
(2) Section 2(b)(2)(A).
(3) Subsections (d)(1)(B) and (e)(3) of section 21.
(4) Section 36(c)(5).
(5) Section 179(d)(2)(A).
(6) Section 318(a)(1)(A)(i).
(7) Section 408(d)(6).
(8) Section 469(i)(5)(B)(ii).
(9) Section 507(d)(2)(B)(iii).
(10) Clauses (ii) and (iii) of section 613A(c)(8)(D).
(11) Section 672(e)(2).
(12) Section 704(e)(2).
(13) Subparagraphs (A) and (B)(ii) of section 911(c)(3).
(14) Section 1235(c)(2).
(15) Section 1563(e)(5).
(16) Section 3121(b)(3)(B).
(17) Section 4946(d).
(18) Section 4975(e)(6).
(19) Subparagraphs (A)(iv) and (B) of section 6012(a)(1).
(20) Section 7703(a).
(b) Conforming Amendments.--
(1) The following provisions of the Internal Revenue Code of
1986 are each amended by striking ``his spouse'' each place it
appears and inserting ``the taxpayer's spouse'':
(A) Section 2(a)(2)(B).
(B) Subparagraphs (B) and (C) of section 2(b)(2).
(C) Paragraphs (2) and (6)(A) of section 21(e).
(D) Section 36B(e)(1).
(E) Section 63(e)(3)(B).
(F) Section 86(c)(1)(C)(ii).
(G) Section 105(c)(1).
(H) Section 135(d)(3).
(I) Section 151(b).
(J) Subsections (a) and (d)(7) of section 213.
(K) Section 1233(e)(2)(C).
(L) Section 1239(b)(2).
(M) Section 6504(2).
(2) The following provisions of the Internal Revenue Code of
1986 are each amended by striking ``his spouse'' each place it
appears and inserting ``the employee's spouse'':
(A) Section 132(m)(1).
(B) Section 401(h)(6).
(C) Section 3402(l)(3).
(3) The following provisions of the Internal Revenue Code of
1986 are each amended by striking ``his taxable year'' each
place it appears and inserting ``the individual's taxable
year'':
(A) Section 2(b)(1).
(B) Section 7703(a)(1).
(4) The following provisions of the Internal Revenue Code of
1986 are each amended by striking ``his taxable year'' each
place it appears and inserting ``the taxpayer's taxable year'':
(A) Subparagraphs (B) and (C) of section 2(b)(2) (as
amended by paragraph (1)(B)).
(B) Section 63(f)(1)(A).
(5) The following provisions of the Internal Revenue Code of
1986 are each amended by striking ``his home'' and inserting
``the individual's home'':
(A) Section 2(b)(1)(A).
(B) Section 21(e)(4)(A)(i).
(C) Section 7703(b)(1).
(6) The Internal Revenue Code of 1986, as amended by this
section, is amended--
(A) in section 2(a)(1)(A), by striking ``his two
taxable years'' and inserting ``the taxpayer's two
taxable years'';
(B) in section 2(a)(1)(B), by striking ``his home''
and inserting ``the taxpayer's home'';
(C) in paragraphs (1)(A) and (2)(A) of section 63(f),
by striking ``for himself if he'' both places it
appears and inserting ``for the taxpayer if the
taxpayer'';
(D) in section 63(f)(4), by striking ``his'' both
places it appears and inserting ``the individual's'';
(E) in section 105(b)--
(i) by striking ``his spouse, his
dependents'' and inserting ``the taxpayer's
spouse, the taxpayer's dependents''; and
(ii) by striking ``by him'';
(F) in the heading of section 119(a), by striking ``,
His Spouse, and His Dependents'' and inserting ``and
the Employee's Spouse and Dependents'';
(G) in section 119(a), by striking ``him, his spouse,
or any of his dependents by or on behalf of his
employer'' and inserting ``the employee or the
employee's spouse or dependents by or on behalf of the
employer of the employee'';
(H) in section 119(a)(2), by striking ``his'' both
places it appears and inserting ``the employee's'';
(I) in section 119(d)(3)(B), by striking ``his
spouse, and any of his dependents'' and inserting ``the
employee's spouse, and any of the employee's
dependents'';
(J) in section 129(b)(2), by striking ``himself'' and
inserting ``the spouse's self'';
(K) in section 170(b)(1)(F)(iii)--
(i) by striking ``his spouse'' and inserting
``the spouse of such donor''; and
(ii) by striking ``his death or after the
death of his surviving spouse if she'' and
inserting ``the death of the donor or after the
death of the donor's surviving spouse if such
surviving spouse'';
(L) in section 213(c)(1)--
(i) by striking ``his estate'' and inserting
``the estate of the taxpayer''; and
(ii) by striking ``his death'' and inserting
``the death of the taxpayer'';
(M) in section 213(d)(7), by striking ``he'' and
inserting ``the taxpayer'';
(N) in section 217(g)--
(i) by striking ``, his spouse, or his
dependents'' in paragraph (2) and inserting
``or the spouse or dependents of such member'';
(ii) by striking ``his dependents'' in
paragraph (3) and inserting ``dependents''; and
(iii) by striking ``his spouse'' each place
it appears in paragraph (3) and inserting ``the
member's spouse'';
(O) in section 217(i)(3)(A), by striking ``his'';
(P) in section 267(c), by striking ``his'' each place
it appears and inserting ``the individual's'';
(Q) in section 318(a)(1)(A)(ii), by striking ``his''
and inserting ``the individual's'';
(R) in section 402(l)(4)(D), by striking ``, his
spouse, and dependents'' and inserting ``and the spouse
and dependents of such officer'';
(S) in section 415(l)(2)(B), by striking ``, his
spouse, or his dependents'' and inserting ``or the
participant's spouse or dependents'';
(T) in section 420(f)(6)(A), by striking ``his
covered spouse and dependents'' each place it appears
and inserting ``the covered spouse and dependents of
such retiree'';
(U) in section 424(d)(1), by striking ``his'' and
inserting ``the individual's'';
(V) in section 544(a)(2), by striking ``his'' each
place it appears and inserting ``the individual's'';
(W) in section 911(c)(3), by striking ``him'' each
place it appears in subparagraphs (A) and (B)(ii) and
inserting ``the individual'';
(X) in section 1015(d)(3), by striking ``his spouse''
and inserting ``the donor's spouse'';
(Y) in section 1563(e)--
(i) by striking ``his children'' both places
it appears in paragraphs (5)(D) and (6)(A) and
inserting ``the individual's children''; and
(ii) by striking ``his parents'' both places
it appears in subparagraphs (A) and (B) of
paragraph (6) and inserting ``the individual's
parents'';
(Z) in section 1563(f)(2)(B), by striking ``him'' and
inserting ``the individual'';
(AA) in section 2012(c), by striking ``his spouse''
and inserting ``the decedent's spouse'';
(BB) in section 2032A(e)(10), by striking ``his
surviving spouse'' and inserting ``the decedent's
surviving spouse'';
(CC) in section 2035(b)--
(i) by striking ``his estate'' and inserting
``the decedent's estate''; and
(ii) by striking ``his spouse'' and inserting
``the decedent's spouse'';
(DD) in subsections (a) and (b)(5) of section 2056,
by striking ``his'';
(EE) in section 2523(b)--
(i) by striking ``(or his heirs or assigns)
or such person (or his heirs or assigns)'' in
paragraph (1) and inserting ``(or the donor's
heirs or assigns) or such person (or such
person's heirs or assigns)'';
(ii) by striking ``himself'' in paragraph (1)
and inserting ``the donor's self'';
(iii) by striking ``he'' in paragraph (2) and
inserting ``the donor''; and
(iv) by striking ``him'' each place it
appears in the matter following paragraph (2)
and inserting ``the donor'';
(FF) in section 2523(d), by striking ``himself'' and
inserting ``the donor's self'';
(GG) in section 2523(e), by striking ``his spouse''
and inserting ``the donor's spouse'';
(HH) in section 3121(b)(3)--
(i) by striking ``his father'' in
subparagraph (A) and inserting ``the child's
father'';
(ii) by striking ``his father'' in
subparagraph (B) and inserting ``the
individual's father''; and
(iii) by striking ``his son'' in subparagraph
(B) and inserting ``the individual's son'';
(II) in section 3306(c)(5)--
(i) by striking ``his son'' and inserting
``the individual's son''; and
(ii) by striking ``his father'' and inserting
``the child's father'';
(JJ) in section 3402(l)--
(i) by striking ``he'' each place it appears
in paragraphs (2) and (3)(A) and inserting
``the employee''; and
(ii) by striking ``his taxable year'' both
places it appears in paragraph (3)(B) and
inserting ``the employee's taxable year'';
(KK) in section 4905(a), by striking ``his spouse''
and inserting ``such person's spouse'';
(LL) in section 6046(c), by striking ``his'' both
places it appears and inserting ``the individual's'';
(MM) in section 6103(e)(1)(A)(ii), by striking
``him'' and inserting ``the individual'';
(NN) in section 7448(a)(8), by striking ``his death''
and inserting ``the individual's death'';
(OO) in subsections (d), (m), and (n) of section
7448, by striking ``his'' each place it appears and
inserting ``the individual's'';
(PP) in subsection (m) of section 7448, as so
amended, by striking ``he'' each place it appears and
inserting ``such judge or special trial judge''; and
(QQ) in section 7448(q)--
(i) by striking ``his'' both places it
appears and inserting ``such judge's''; and
(ii) by striking ``to bring himself'' and
inserting ``to come''.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
The bill H.R. 3999, the Promoting Respect for Individuals'
Dignity and Equality (PRIDE) Act of 2019, as ordered reported
by the Committee on Ways and Means on June 20, 2019, amends the
Internal Revenue Code of 1986 so as to provide lawfully married
same-sex couples with the ability to file claims for credits
and refunds related to a change in marital status back to their
year of marriage, and to amend such code so that provisions
that apply to married couples use gender-neutral language.
B. Background and Need for Legislation
The Promoting Respect for Individuals' Dignity and Equality
(PRIDE) Act of 2019 makes long-overdue changes to the tax code
for same-sex married couples. June 28, 2019 is the 50th
anniversary of the Stonewall riots. To commemorate that moment
in the LGBTQ+ movement, the PRIDE Act scrubs the tax code of
any gendered language related to married couples.
Additionally, the legislation resolves a problem related to
the mismatched timing of IRS guidance changes and state-level
same-sex marriage legalization. Specifically, after the 2013
Supreme Court ruling in United States v. Windsor, 570 U.S. 744
(2013), the IRS updated its procedures to allow same-sex
couples to amend old returns from 2010 onwards to reflect their
marital status and claim overpayment credits for years they
were married but unable to file jointly. H.R. 3299 allows same-
sex couples to file federal income tax adjustments back to the
date of marriage providing additional relief for those couples
who were lawfully married under state law before 2010.
C. Legislative History
Background
H.R. 3299, the ``Promoting Respect for Individuals' Dignity
and Equality Act of 2019,'' was introduced on June 18, 2019,
and was referred to the Committee on Ways and Means.
Committee action
The Committee on Ways and Means marked up H.R. 3299 on June
20, 2019, and ordered the bill, as amended, favorably reported
(with a quorum being present).
Committee hearings
The Committee on Ways and Means heard testimony from Rep.
Andy Levin on June 4, 2019 regarding H.R. 1244, the Equal
Dignity for Married Taxpayers Act of 2019. Additionally, on
June 4, 2019, the Committee heard testimony from Rep. Judy Chu
regarding H.R. 3294, the Refund Equality Act of 2019.
Provisions substantially similar to both H.R. 1244 and H.R.
3294 are included in H.R. 3299.
II. EXPLANATION OF THE BILL
A. Extension of Period of Limitation for Certain Legally Married
Couples (Sec. 2 of the Bill and Sec. 6511 of the Code)
PRESENT LAW
Statute of limitations on credit or refund
In general, a taxpayer must file a claim for credit or
refund within three years of the filing of the tax return or
within two years of the payment of the tax, whichever expires
later (if no tax return is filed, the two-year limit
applies).\1\ A claim for credit or refund that is not filed
within these time periods is rejected as untimely. In addition,
the amount of credit or refund is limited to the portion of tax
paid within the three-year period (plus any filing extension)
or the two-year period, as applicable, immediately preceding
the filing of the claim.\2\
---------------------------------------------------------------------------
\1\Sec. 6511(a).
\2\Sec. 6511(b)(2).
---------------------------------------------------------------------------
Limitation on filing a joint return after filing a separate return
An individual filing a separate return for a tax year for
which the individual and the individual's spouse could have
filed a joint return may file a joint return amending the prior
separate return for the tax year after the due date for filing
the return has passed.\3\ However, an individual cannot elect
to file a joint return after having filed a separate return
more than three years after the due date of the return (without
regard to any extensions) for the applicable tax year.\4\
---------------------------------------------------------------------------
\3\Sec. 6013(b)(1).
\4\Sec. 6013(b)(2).
---------------------------------------------------------------------------
Federal tax treatment of same-sex marriage
Prior to the Supreme Court's decision in United States v.
Windsor,\5\ section 3 of the Defense of Marriage Act (DOMA)\6\
prohibited the IRS from recognizing same-sex marriages for
purposes of the provisions of the Code that refer to the
marital status of the taxpayer and convey benefits upon such
status. In Windsor, the Supreme Court held that section 3 of
DOMA was unconstitutional because it violated principles of
equal protection.
---------------------------------------------------------------------------
\5\570 U.S. 744 (2013).
\6\1 U.S.C. sec. 7.
---------------------------------------------------------------------------
Following the Windsor decision, the IRS issued Revenue
Ruling 2013-17\7\ (the ``Revenue Ruling''), which provided
guidance on the effect of the Windsor decision on the IRS's
interpretation of the provisions of the Code that refer to a
taxpayer's marital status. In the Revenue Ruling, the IRS
recognized the validity of same-sex marriages that were lawful
in the State where they occurred. In particular, the Revenue
Ruling made three specific holdings for Federal tax purposes:
---------------------------------------------------------------------------
\7\2013-38 I.R.B. 201.
---------------------------------------------------------------------------
1. The terms ``spouse,'' ``husband and wife,''
``husband,'' and ``wife'' include an individual married
to a person of the same sex if the individuals are
lawfully married under State law, and the term
``marriage'' includes such a marriage between
individuals of the same sex.
2. The IRS adopts a general rule recognizing a
marriage of same-sex individuals that was validly
entered into in a State whose laws authorize the
marriage of two individuals of the same sex even if the
married couple is domiciled in a State that does not
recognize the validity of same-sex marriages.
3. The terms ``spouse,'' ``husband and wife,''
``husband,'' and ``wife'' do not include individuals
(whether of the opposite sex or the same sex) who have
entered into a registered domestic partnership, civil
union, or other similar formal relationship recognized
under State law that is not denominated as a marriage
under the laws of that State, and the term ``marriage''
does not include such formal relationships.
The holdings of Revenue Ruling 2013-17 were applied
prospectively as of September 16, 2013. The Revenue Ruling
allowed affected taxpayers to rely on the ruling for purposes
of filing original returns, amended returns, adjusted returns,
or claims for credit or refund resulting from its holdings but
only if the applicable limitations period for filing such
claims had not expired. Thus, taxpayers lawfully married under
State law during tax years for which the statute of limitations
was closed as of September 16, 2013, could not claim the tax
benefits of Federal recognition of same-sex marriage. Among
those that were affected were residents of Massachusetts and
several other States that recognized same-sex marriage during
years for which the statute of limitations generally was closed
as of September 16, 2013.\8\ Accordingly, some lawfully married
same-sex couples were not able to claim Federal tax benefits
associated with their marital status for all tax years for
which they were lawfully married.
---------------------------------------------------------------------------
\8\The States that recognized same-sex marriage prior to 2010 (the
years for which the statute of limitations would generally be closed
for taxpayers amending their returns in calendar year 2013) are
Massachusetts, California (during a portion of 2008), Connecticut, Iowa
and Vermont.
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee believes that lawfully married same-sex
couples should be entitled to the Federal tax benefits of their
marital status for all years for which their marriages are
recognized under State law. Although the Revenue Ruling
provided limited relief for married same-sex couples, the IRS
does not have the authority to allow claims for years for which
the statute of limitations was closed. This provision provides
full relief to married same-sex couples and ensures equal
Federal tax treatment between same-sex married couples and
other married couples for all applicable years.
EXPLANATION OF PROVISION
Under the provision, lawfully married same-sex couples may
file an amended return (including a joint return after filing a
return other than a joint return\9\) and a claim for credit or
refund relating to a change in marital status as a result of
the holdings in Revenue Ruling 2013-17 for taxable years ending
before September 16, 2013. The period for filing an amended
return or claim for refund under the provision expires on the
filing date (including extensions) of the return for the tax
year that includes the date of enactment of the provision. In
addition, the limitation on the dollar amounts recoverable is
made inapplicable for newly-filed joint returns.
---------------------------------------------------------------------------
\9\Because this legislation involves the novel situation of a
retroactive change in the marital status of an individual for purpose
of the Code, the provision clarifies that in applying section 6013(b)
in this situation, the term ``separate return'' means any return other
than a joint return. No inference is intended as the application of
section 6013(b) in any other situation.
---------------------------------------------------------------------------
EFFECTIVE DATE
The provision is effective on the date of enactment.
B. Rules Relating to All Legally Married Couples, and Rules Relating to
the Gender of Spouses, Etc. (Secs. 3 and 4 of the Bill)
PRESENT LAW
The Code contains a number of provisions that apply to
married couples. While these provisions apply to both opposite-
sex and same-sex married couples,\10\ they generally refer to
``husband and wife'' or otherwise use gendered language in
describing the couple or one or both spouses.
---------------------------------------------------------------------------
\10\Rev. Rul. 2013-17. For a full description of Revenue Ruling
2013-17, see discussion above.
---------------------------------------------------------------------------
For example, the Code allows taxpayers to claim a
nonrefundable child and dependent care credit, for which the
allowable credit is an applicable percentage of employment-
related expenses. For purposes of this credit, qualifying
expenses are limited by the earned income of the taxpayer. A
special rule applies in the case of married couples:
Section 21(d)(2). Special rule for spouse who is a
student or incapable of caring for himself. In the case
of a spouse who is a student or a qualifying individual
described in subsection (b)(1)(C), for purposes of the
paragraph (1), such spouse shall be deemed for each
month during which such spouse is a full-time student
at an educational institution, or is such a qualifying
individual, to be gainfully employed and to have earned
income of not less than--
(A) $250 if subsection (c)(1) applies for the taxable
year, or
(B) $500 if subsection (c)(2) applies for the taxable
year.
In the case of any husband and wife, this paragraph
shall apply with respect to only one spouse for any one
month.
REASONS FOR CHANGE
The Committee believes that the Code should be modernized
to remove outdated references relating to marriage and replace
them with gender-neutral terms. This provision ensures equal
dignity for all taxpayers.
EXPLANATION OF PROVISIONS
The provisions amend the Code so that provisions that apply
to married couples use gender-neutral language, by changing
terms such as ``husband and wife'' or other gendered language.
For example, with respect to section 21(d)(2), quoted
above, the provisions change ``himself'' to ``self'' and
``husband and wife'' to ``any married couple.''
EFFECTIVE DATE
The provisions are effective on the date of enactment.
III. VOTES OF THE COMMITTEE
Pursuant to clause 3(b) of rule XIII of the Rules of the
House of Representatives, the following statement is made
concerning the vote of the Committee on Ways and Means during
the markup consideration of H.R. 3299, the ``Promoting Respect
for Individuals' Dignity and Equality Act of 2019'' on June 20,
2019.
The amendment in the nature of a substitute was agreed to
by voice vote (with a quorum being present).
The bill, H.R. 3299, as amended, was ordered favorably
reported to the House of Representatives by voice vote (with a
quorum being present).
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the bill, H.R. 3299, as
ordered reported.
The bill is estimated to decrease Federal fiscal year
budget receipts by $57 million dollars for the period 2019
through 2029.
ESTIMATED BUDGET EFFECTS OF H.R. 3299, THE ``PROMPTING RESPECT FOR INDIVIDUALS' DIGNITY AND EQUALITY ACT OF 2019,'' AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS--Fiscal Years 2019-2029
[Millions of Dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2019- 24 2019- 29
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1. Extension of period of limitation DOE.................... [1] -57 [1] - - - - - - - - - - - - - - - - - - - - - - - - -57 -57
for certain legally married couples.
2. Rules relating to all legally DOE.................... ........ No Revenue Effect
married couples.
3. Rules relating to the gender of ....................... No Revenue Effect
spouses, etc..
----------------------------------------------------------------------------------------------------------------------------------------------------------
NET TOTAL........................ ....................... [1] -57 [1] [2] [2] [2] [2] [2] [2] [2] [2] -57 -57
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Joint Committee on Taxation
----------------------
NOTE: Details may not add to totals due to rounding.
Legend for "Effective" column: DOE = date of enactment
[1]Loss of less than $500,000.
[2]No revenue effect.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
Pursuant to clause 3(c)(2) of rule XIII of the Rules of the
House of Representatives, the Committee states that the bill
involves no new or increased budget authority. The Committee
further states that the bill involves no new tax expenditure.
C. Cost Estimate Prepared by the Congressional Budget Office
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, requiring a cost estimate prepared by
CBO, the following statement by CBO is provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, June 25, 2019.
Hon. Richard Neal,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3299, the
Promoting Respect for Individuals' Dignity and Equality Act of
2019.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Shannon Mok.
Sincerely,
Mark P. Hadley
(For Phillip L. Swagel, Director).
Enclosure.
The bill would
Extend the statute of limitations for
certain lawfully married same-sex couples to file
amended tax returns and claims for credit or refund
Amend the Internal Revenue Code to use
gender-neutral language
Estimated budgetary effects would primarily stem from
A reduction in tax liability from filing a
joint return
The Congressional Budget Act of 1974, as amended,
stipulates that revenue estimates provided by the staff of the
Joint Committee on Taxation (JCT) are the official estimates
for all tax legislation considered by the Congress. CBO
therefore incorporates such estimates into its cost estimates
of the effects of legislation. All of the estimates for the
provisions of H.R. 3299 were provided by JCT.
Bill summary: H.R. 3299 would extend the statute of
limitations for filing amended returns or claims for credit or
refund for same-sex couples who were married prior to the
federal recognition of same-sex marriage and for whom the
statute of limitations had closed as of September 16, 2013. The
extended statute of limitations would expire on the filing date
(including extensions) of the return for the tax year in which
the proposal is enacted. In addition, it would amend the
Internal Revenue Code to use gender-neutral language in
describing couples and spouses.
Estimated Federal cost: The estimated budgetary effect of
H.R. 3299 is shown in Table 1.
TABLE 1.--ESTIMATED BUDGETARY EFFECTS OF H.R. 3299
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, millions of dollars--
-------------------------------------------------------------------------------------------------------------
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2019-2024 2019-2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
Decreases (-) in Revenues
Estimated Revenues........................ * -57 * 0 0 0 0 0 0 0 0 -57 -57
Increases in the Deficit From Changes in Revenues
Effect on the Deficit..................... * 57 * 0 0 0 0 0 0 0 0 57 57
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Components may not sum to totals because of rounding; * = between -$500,000 and $500,000.
Basis of estimate: The Congressional Budget Act of 1974, as
amended, stipulates that revenue estimates provided by the
staff of the Joint Committee on Taxation (JCT) are the official
estimates for all tax legislation considered by the Congress.
CBO therefore incorporates such estimates into its cost
estimates of the effects of legislation. All of the estimates
for the provisions of H.R. 3299 were provided by JCT.\1\
---------------------------------------------------------------------------
\1\For JCT's estimates of the provisions, which include detail
beyond the summary presented below, see Joint Committee on Taxation,
Estimated Revenue Effects of H.R. 3299, The ``Promoting Respect for
Individuals' Dignity and Equality Act of 2019,'' JCX-27-19 (June 18,
2019) https://go.usa.gov/xyCgv
---------------------------------------------------------------------------
Revenues: On net, JCT estimates, enacting the bill would
decrease revenues by $57 million over the 2019-2029 period.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee advises that the
findings and recommendations of the Committee, based on
oversight activities under clause 2(b)(1) of rule X of the
Rules of the House of Representatives, are incorporated into
the explanations of the provisions in this report.
B. Statement of General Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that, because
the bill contains no measure that authorizes funding, no
statement of general performance goals and objectives is
required.
C. Information Relating to Unfunded Mandates
Pursuant to section 423 of Public Law 104-4, the Unfunded
Mandates Reform Act of 1995, the Committee has determined that
the bill does not contain Federal mandates on the private
sector. Further, the Committee has determined that the bill
does not impose a Federal intergovernmental mandate on State,
local, or tribal governments.
D. Applicability of House Rule XXI, Clause 5(b)
Clause 5(b) of rule XXI of the Rules of the House of
Representatives provides, in part, that ``It shall not be in
order to consider a bill, joint resolution, amendment, or
conference report carrying a retroactive Federal income tax
rate increase.'' The Committee, after careful review, states
that the bill does not involve any retroactive Federal income
tax rate increase within the meaning of the rule.
E. Tax Complexity Analysis
Section 4022(b) of Public Law 105-206, the Internal Revenue
Service Restructuring and Reform Act of 1998 (the ``RRA''),
requires the staff of the Joint Committee on Taxation (in
consultation with the Internal Revenue Service and the Treasury
Department) to provide a tax complexity analysis. The
complexity analysis is required for all legislation reported by
the Senate Committee on Finance, the House Committee on Ways
and Means, or any committee of conference if the legislation
includes a provision that directly or indirectly amends the
Internal Revenue Code of 1986 and has widespread applicability
to individuals or small businesses.
Pursuant to clause 3(h)(1) of rule XIII of the Rules of the
House of Representatives, the staff of the Joint Committee on
Taxation has determined that a complexity analysis is not
required under section 4022(b) of the RRA because the bill
contains no provision that amends the Internal Revenue Code of
1986 and has ``widespread applicability'' to individuals or
small businesses within the meaning of the rule.
F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee, after careful review,
states that no provision of the bill contains any congressional
earmark, limited tax benefit, or limited tariff benefit within
the meaning of the rule.
G. Duplication of Federal Programs
Pursuant to clause 3(c)(5) of rule XIII of the Rules of the
House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program, (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139, or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to section 6104 of
title 31, United States Code.
H. Hearings
In compliance with Sec. 103(i) of H. Res. 6 (116th
Congress) the following hearing was used to develop or consider
H.R. 3299: House Ways and Means Committee Member Day Hearing
held on June 4, 2019 during which Representative Andy Levin (D-
MI) and Representative Judy Chu (D-CA) testified regarding
legislation that is incorporated into H.R. 3299.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL
A. Changes in Existing Law Proposed by the Bill
Pursuant to clause 3(e)(1)(B) of rule XIII of the Rules of
the House of Representatives, changes in existing law proposed
by the bill are shown as follows (existing law proposed to be
omitted is enclosed in black brackets, new matter is printed in
italics, existing law in which no change is proposed is shown
in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italics, and existing law in which no
change is proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter A--DETERMINATION OF TAX LIABILITY
* * * * * * *
PART I--TAX ON INDIVIDUALS
* * * * * * *
SEC. 1. TAX IMPOSED.
(a) Married individuals filing joint returns and surviving
spouses.--There is hereby imposed on the taxable income of--
(1) every married individual (as defined in section
7703) who makes a single return jointly with [his
spouse] the individual's spouse under section 6013, and
(2) every surviving spouse (as defined in section
2(a)),
a tax determined in accordance with the following table:
(b) Heads of households.--There is hereby imposed on the
taxable income of every head of a household (as defined in
section 2(b)) a tax determined in accordance with the following
table:
(c) Unmarried individuals (other than surviving spouses and
heads of households).--There is hereby imposed on the taxable
income of every individual (other than a surviving spouse as
defined in section 2(a) or the head of a household as defined
in section 2(b)) who is not a married individual (as defined in
section 7703) a tax determined in accordance with the following
table:
(d) Married individuals filing separate returns.--There is
hereby imposed on the taxable income of every married
individual (as defined in section 7703) who does not make a
single return jointly with [his spouse] the individual's spouse
under section 6013, a tax determined in accordance with the
following table:
(e) Estates and trusts.--There is hereby imposed on the
taxable income of--
(1) every estate, and
(2) every trust,
taxable under this subsection a tax determined in accordance
with the following table:
(f) Phaseout of marriage penalty in 15-percent bracket;
adjustments in tax tables so that inflation will not result in
tax increases.--
(1) In general.--Not later than December 15 of 1993,
and each subsequent calendar year, the Secretary shall
prescribe tables which shall apply in lieu of the
tables contained in subsections (a), (b), (c), (d), and
(e) with respect to taxable years beginning in the
succeeding calendar year.
(2) Method of prescribing tables.--The table which
under paragraph (1) is to apply in lieu of the table
contained in subsection (a), (b), (c), (d), or (e), as
the case may be, with respect to taxable years
beginning in any calendar year shall be prescribed--
(A) except as provided in paragraph (8), by
increasing the minimum and maximum dollar
amounts for each bracket for which a tax is
imposed under such table by the cost-of-living
adjustment for such calendar year, determined--
(i) except as provided in clause
(ii), by substituting ``1992'' for
``2016'' in paragraph (3)(A)(ii), and
(ii) in the case of adjustments to
the dollar amounts at which the 36
percent rate bracket begins or at which
the 39.6 percent rate bracket begins,
by substituting ``1993'' for ``2016''
in paragraph (3)(A)(ii),
(B) by not changing the rate applicable to
any rate bracket as adjusted under subparagraph
(A), and
(C) by adjusting the amounts setting forth
the tax to the extent necessary to reflect the
adjustments in the rate brackets.
(3) Cost-of-living adjustment.--For purposes of this
subsection--
(A) In general.--The cost-of-living
adjustment for any calendar year is the
percentage (if any) by which--
(i) the C-CPI-U for the preceding
calendar year, exceeds
(ii) the CPI for calendar year 2016,
multiplied by the amount determined
under subparagraph (B).
(B) Amount determined.--The amount determined
under this clause is the amount obtained by
dividing--
(i) the C-CPI-U for calendar year
2016, by
(ii) the CPI for calendar year 2016.
(C) Special rule for adjustments with a base
year after 2016.--For purposes of any provision
of this title which provides for the
substitution of a year after 2016 for ``2016''
in subparagraph (A)(ii), subparagraph (A) shall
be applied by substituting ``the C-CPI-U for
calendar year 2016'' for ``the CPI for calendar
year 2016'' and all that follows in clause (ii)
thereof.
(4) CPI for any calendar year.--For purposes of
paragraph (3), the CPI for any calendar year is the
average of the Consumer Price Index as of the close of
the 12-month period ending on August 31 of such
calendar year.
(5) Consumer Price Index.--For purposes of paragraph
(4), the term ``Consumer Price Index'' means the last
Consumer Price Index for all-urban consumers published
by the Department of Labor. For purposes of the
preceding sentence, the revision of the Consumer Price
Index which is most consistent with the Consumer Price
Index for calendar year 1986 shall be used.
(6) C-CPI-U.--For purposes of this subsection--
(A) In general.--The term ``C-CPI-U'' means
the Chained Consumer Price Index for All Urban
Consumers (as published by the Bureau of Labor
Statistics of the Department of Labor). The
values of the Chained Consumer Price Index for
All Urban Consumers taken into account for
purposes of determining the cost-of-living
adjustment for any calendar year under this
subsection shall be the latest values so
published as of the date on which such Bureau
publishes the initial value of the Chained
Consumer Price Index for All Urban Consumers
for the month of August for the preceding
calendar year.
(B) Determination for calendar year.--The C-
CPI-U for any calendar year is the average of
the C-CPI-U as of the close of the 12-month
period ending on August 31 of such calendar
year.
(7) Rounding.--
(A) In general.--If any increase determined
under paragraph (2)(A), section 63(c)(4),
section 68(b)(2) or section 151(d)(4) is not a
multiple of $50, such increase shall be rounded
to the next lowest multiple of $50.
(B) Table for married individuals filing
separately.--In the case of a married
individual filing a separate return,
subparagraph (A) (other than with respect to
sections 63(c)(4) and 151(d)(4)(A)) shall be
applied by substituting ``$25'' for ``$50''
each place it appears.
(8) Elimination of marriage penalty in 15-percent
bracket.--With respect to taxable years beginning after
December 31, 2003, in prescribing the tables under
paragraph (1)--
(A) the maximum taxable income in the 15-
percent rate bracket in the table contained in
subsection (a) (and the minimum taxable income
in the next higher taxable income bracket in
such table) shall be 200 percent of the maximum
taxable income in the 15-percent rate bracket
in the table contained in subsection (c) (after
any other adjustment under this subsection),
and
(B) the comparable taxable income amounts in
the table contained in subsection (d) shall be
1/2 of the amounts determined under
subparagraph (A).
(g) Certain unearned income of children taxed as if parent's
income.--
(1) In general.--In the case of any child to whom
this subsection applies, the tax imposed by this
section shall be equal to the greater of--
(A) the tax imposed by this section without
regard to this subsection, or
(B) the sum of--
(i) the tax which would be imposed by
this section if the taxable income of
such child for the taxable year were
reduced by the net unearned income of
such child, plus
(ii) such child's share of the
allocable parental tax.
(2) Child to whom subsection applies.--This
subsection shall apply to any child for any taxable
year if--
(A) such child--
(i) has not attained age 18 before
the close of the taxable year, or
(ii)(I) has attained age 18 before
the close of the taxable year and meets
the age requirements of section
152(c)(3) (determined without regard to
subparagraph (B) thereof), and
(II) whose earned income (as defined
in section 911(d)(2)) for such taxable
year does not exceed one-half of the
amount of the individual's support
(within the meaning of section
152(c)(1)(D) after the application of
section 152(f)(5) (without regard to
subparagraph (A) thereof)) for such
taxable year,
(B) either parent of such child is alive at
the close of the taxable year, and
(C) such child does not file a joint return
for the taxable year.
(3) Allocable parental tax.--For purposes of this
subsection--
(A) In general.--The term ``allocable
parental tax'' means the excess of--
(i) the tax which would be imposed by
this section on the parent's taxable
income if such income included the net
unearned income of all children of the
parent to whom this subsection applies,
over
(ii) the tax imposed by this section
on the parent without regard to this
subsection.
For purposes of clause (i), net unearned income
of all children of the parent shall not be
taken into account in computing any exclusion,
deduction, or credit of the parent.
(B) Child's share.--A child's share of any
allocable parental tax of a parent shall be
equal to an amount which bears the same ratio
to the total allocable parental tax as the
child's net unearned income bears to the
aggregate net unearned income of all children
of such parent to whom this subsection applies.
(C) Special rule where parent has different
taxable year.--Except as provided in
regulations, if the parent does not have the
same taxable year as the child, the allocable
parental tax shall be determined on the basis
of the taxable year of the parent ending in the
child's taxable year.
(4) Net unearned income.--For purposes of this
subsection--
(A) In general.--The term ``net unearned
income'' means the excess of--
(i) the portion of the adjusted gross
income for the taxable year which is
not attributable to earned income (as
defined in section 911(d)(2)), over
(ii) the sum of--
(I) the amount in effect for
the taxable year under section
63(c)(5)(A) (relating to
limitation on standard
deduction in the case of
certain dependents), plus
(II) the greater of the
amount described in subclause
(I) or, if the child itemizes
his deductions for the taxable
year, the amount of the
itemized deductions allowed by
this chapter for the taxable
year which are directly
connected with the production
of the portion of adjusted
gross income referred to in
clause (i).
(B) Limitation based on taxable income.--The
amount of the net unearned income for any
taxable year shall not exceed the individual's
taxable income for such taxable year.
(C) Treatment of distributions from qualified
disability trusts.--For purposes of this
subsection, in the case of any child who is a
beneficiary of a qualified disability trust (as
defined in section 642(b)(2)(C)(ii)), any
amount included in the income of such child
under sections 652 and 662 during a taxable
year shall be considered earned income of such
child for such taxable year.
(5) Special rules for determining parent to whom
subsection applies.--For purposes of this subsection,
the parent whose taxable income shall be taken into
account shall be--
(A) in the case of parents who are not
married (within the meaning of section 7703),
the custodial parent (within the meaning of
section 152(e)) of the child, and
(B) in the case of married individuals filing
separately, the individual with the greater
taxable income.
(6) Providing of parent's TIN.--The parent of any
child to whom this subsection applies for any taxable
year shall provide the TIN of such parent to such child
and such child shall include such TIN on the child's
return of tax imposed by this section for such taxable
year.
(7) Election to claim certain unearned income of
child on parent's return.--
(A) In general.--If--
(i) any child to whom this subsection
applies has gross income for the
taxable year only from interest and
dividends (including Alaska Permanent
Fund dividends),
(ii) such gross income is more than
the amount described in paragraph
(4)(A)(ii)(I) and less than 10 times
the amount so described,
(iii) no estimated tax payments for
such year are made in the name and TIN
of such child, and no amount has been
deducted and withheld under section
3406, and
(iv) the parent of such child (as
determined under paragraph (5)) elects
the application of subparagraph (B),
such child shall be treated (other than for
purposes of this paragraph) as having no gross
income for such year and shall not be required
to file a return under section 6012.
(B) Income included on parent's return.--In
the case of a parent making the election under
this paragraph--
(i) the gross income of each child to
whom such election applies (to the
extent the gross income of such child
exceeds twice the amount described in
paragraph (4)(A)(ii)(I)) shall be
included in such parent's gross income
for the taxable year,
(ii) the tax imposed by this section
for such year with respect to such
parent shall be the amount equal to the
sum of--
(I) the amount determined
under this section after the
application of clause (i), plus
(II) for each such child, 10
percent of the lesser of the
amount described in paragraph
(4)(A)(ii)(I) or the excess of
the gross income of such child
over the amount so described,
and
(iii) any interest which is an item
of tax preference under section
57(a)(5) of the child shall be treated
as an item of tax preference of such
parent (and not of such child).
(C) Regulations.--The Secretary shall
prescribe such regulations as may be necessary
or appropriate to carry out the purposes of
this paragraph.
(h) Maximum capital gains rate.--
(1) In general.--If a taxpayer has a net capital gain
for any taxable year, the tax imposed by this section
for such taxable year shall not exceed the sum of--
(A) a tax computed at the rates and in the
same manner as if this subsection had not been
enacted on the greater of--
(i) taxable income reduced by the net
capital gain; or
(ii) the lesser of--
(I) the amount of taxable
income taxed at a rate below 25
percent; or
(II) taxable income reduced
by the adjusted net capital
gain;
(B) 0 percent of so much of the adjusted net
capital gain (or, if less, taxable income) as
does not exceed the excess (if any) of--
(i) the amount of taxable income
which would (without regard to this
paragraph) be taxed at a rate below 25
percent, over
(ii) the taxable income reduced by
the adjusted net capital gain;
(C) 15 percent of the lesser of--
(i) so much of the adjusted net
capital gain (or, if less, taxable
income) as exceeds the amount on which
a tax is determined under subparagraph
(B), or
(ii) the excess of--
(I) the amount of taxable
income which would (without
regard to this paragraph) be
taxed at a rate below 39.6
percent, over
(II) the sum of the amounts
on which a tax is determined
under subparagraphs (A) and
(B),
(D) 20 percent of the adjusted net capital
gain (or, if less, taxable income) in excess of
the sum of the amounts on which tax is
determined under subparagraphs (B) and (C),
(E) 25 percent of the excess (if any) of--
(i) the unrecaptured section 1250
gain (or, if less, the net capital gain
(determined without regard to paragraph
(11))), over
(ii) the excess (if any) of--
(I) the sum of the amount on
which tax is determined under
subparagraph (A) plus the net
capital gain, over
(II) taxable income; and
(F) 28 percent of the amount of taxable
income in excess of the sum of the amounts on
which tax is determined under the preceding
subparagraphs of this paragraph.
(2) Net capital gain taken into account as investment
income.--For purposes of this subsection, the net
capital gain for any taxable year shall be reduced (but
not below zero) by the amount which the taxpayer takes
into account as investment income under section
163(d)(4)(B)(iii).
(3) Adjusted net capital gain.--For purposes of this
subsection, the term ``adjusted net capital gain''
means the sum of--
(A) net capital gain (determined without
regard to paragraph (11)) reduced (but not
below zero) by the sum of--
(i) unrecaptured section 1250 gain,
and
(ii) 28-percent rate gain, plus
(B) qualified dividend income (as defined in
paragraph (11)).
(4) 28-percent rate gain.--For purposes of this
subsection, the term ``28-percent rate gain'' means the
excess (if any) of--
(A) the sum of--
(i) collectibles gain; and
(ii) section 1202 gain, over
(B) the sum of--
(i) collectibles loss;
(ii) the net short-term capital loss;
and
(iii) the amount of long-term capital
loss carried under section
1212(b)(1)(B) to the taxable year.
(5) Collectibles gain and loss.--For purposes of this
subsection--
(A) In general.--The terms ``collectibles
gain'' and ``collectibles loss'' mean gain or
loss (respectively) from the sale or exchange
of a collectible (as defined in section 408(m)
without regard to paragraph (3) thereof) which
is a capital asset held for more than 1 year
but only to the extent such gain is taken into
account in computing gross income and such loss
is taken into account in computing taxable
income.
(B) Partnerships, etc..--For purposes of
subparagraph (A), any gain from the sale of an
interest in a partnership, S corporation, or
trust which is attributable to unrealized
appreciation in the value of collectibles shall
be treated as gain from the sale or exchange of
a collectible. Rules similar to the rules of
section 751 shall apply for purposes of the
preceding sentence.
(6) Unrecaptured section 1250 gain.--For purposes of
this subsection--
(A) In general.--The term ``unrecaptured
section 1250 gain'' means the excess (if any)
of--
(i) the amount of long-term capital
gain (not otherwise treated as ordinary
income) which would be treated as
ordinary income if section 1250(b)(1)
included all depreciation and the
applicable percentage under section
1250(a) were 100 percent, over
(ii) the excess (if any) of--
(I) the amount described in
paragraph (4)(B); over
(II) the amount described in
paragraph (4)(A).
(B) Limitation with respect to section 1231
property.--The amount described in subparagraph
(A)(i) from sales, exchanges, and conversions
described in section 1231(a)(3)(A) for any
taxable year shall not exceed the net section
1231 gain (as defined in section 1231(c)(3))
for such year.
(7) Section 1202 gain.--For purposes of this
subsection, the term ``section 1202 gain'' means the
excess of--
(A) the gain which would be excluded from
gross income under section 1202 but for the
percentage limitation in section 1202(a), over
(B) the gain excluded from gross income under
section 1202.
(8) Coordination with recapture of net ordinary
losses under section 1231.--If any amount is treated as
ordinary income under section 1231(c), such amount
shall be allocated among the separate categories of net
section 1231 gain (as defined in section 1231(c)(3)) in
such manner as the Secretary may by forms or
regulations prescribe.
(9) Regulations.--The Secretary may prescribe such
regulations as are appropriate (including regulations
requiring reporting) to apply this subsection in the
case of sales and exchanges by pass-thru entities and
of interests in such entities.
(10) Pass-thru entity defined.--For purposes of this
subsection, the term ``pass-thru entity'' means--
(A) a regulated investment company;
(B) a real estate investment trust;
(C) an S corporation;
(D) a partnership;
(E) an estate or trust;
(F) a common trust fund; and
(G) a qualified electing fund (as defined in
section 1295).
(11) Dividends taxed as net capital gain.--
(A) In general.--For purposes of this
subsection, the term ``net capital gain'' means
net capital gain (determined without regard to
this paragraph) increased by qualified dividend
income.
(B) Qualified dividend income.--For purposes
of this paragraph--
(i) In general.--The term ``qualified
dividend income'' means dividends
received during the taxable year from--
(I) domestic corporations,
and
(II) qualified foreign
corporations.
(ii) Certain dividends excluded.--
Such term shall not include--
(I) any dividend from a
corporation which for the
taxable year of the corporation
in which the distribution is
made, or the preceding taxable
year, is a corporation exempt
from tax under section 501 or
521,
(II) any amount allowed as a
deduction under section 591
(relating to deduction for
dividends paid by mutual
savings banks, etc.), and
(III) any dividend described
in section 404(k).
(iii) Coordination with section
246(c).--Such term shall not include
any dividend on any share of stock--
(I) with respect to which the
holding period requirements of
section 246(c) are not met
(determined by substituting in
section 246(c) ``60 days'' for
``45 days'' each place it
appears and by substituting
``121-day period'' for ``91-day
period''), or
(II) to the extent that the
taxpayer is under an obligation
(whether pursuant to a short
sale or otherwise) to make
related payments with respect
to positions in substantially
similar or related property.
(C) Qualified foreign corporations.--
(i) In general.--Except as otherwise
provided in this paragraph, the term
``qualified foreign corporation'' means
any foreign corporation if--
(I) such corporation is
incorporated in a possession of
the United States, or
(II) such corporation is
eligible for benefits of a
comprehensive income tax treaty
with the United States which
the Secretary determines is
satisfactory for purposes of
this paragraph and which
includes an exchange of
information program.
(ii) Dividends on stock readily
tradable on United States securities
market.--A foreign corporation not
otherwise treated as a qualified
foreign corporation under clause (i)
shall be so treated with respect to any
dividend paid by such corporation if
the stock with respect to which such
dividend is paid is readily tradable on
an established securities market in the
United States.
(iii) Exclusion of dividends of
certain foreign corporations.--Such
term shall not include--
(I) any foreign corporation
which for the taxable year of
the corporation in which the
dividend was paid, or the
preceding taxable year, is a
passive foreign investment
company (as defined in section
1297), and
(II) any corporation which
first becomes a surrogate
foreign corporation (as defined
in section 7874(a)(2)(B)) after
the date of the enactment of
this subclause, other than a
foreign corporation which is
treated as a domestic
corporation under section
7874(b).
(iv) Coordination with foreign tax
credit limitation.--Rules similar to
the rules of section 904(b)(2)(B) shall
apply with respect to the dividend rate
differential under this paragraph.
(D) Special rules.--
(i) Amounts taken into account as
investment income.--Qualified dividend
income shall not include any amount
which the taxpayer takes into account
as investment income under section
163(d)(4)(B).
(ii) Extraordinary dividends.--If a
taxpayer to whom this section applies
receives, with respect to any share of
stock, qualified dividend income from 1
or more dividends which are
extraordinary dividends (within the
meaning of section 1059(c)), any loss
on the sale or exchange of such share
shall, to the extent of such dividends,
be treated as long-term capital loss.
(iii) Treatment of dividends from
regulated investment companies and real
estate investment trusts.--A dividend
received from a regulated investment
company or a real estate investment
trust shall be subject to the
limitations prescribed in sections 854
and 857.
(i) Rate reductions after 2000.--
(1) 10-percent rate bracket.--
(A) In general.--In the case of taxable years
beginning after December 31, 2000--
(i) the rate of tax under subsections
(a), (b), (c), and (d) on taxable
income not over the initial bracket
amount shall be 10 percent, and
(ii) the 15 percent rate of tax shall
apply only to taxable income over the
initial bracket amount but not over the
maximum dollar amount for the 15-
percent rate bracket.
(B) Initial bracket amount.--For purposes of
this paragraph, the initial bracket amount is--
(i) $14,000 in the case of subsection
(a),
(ii) $10,000 in the case of
subsection (b), and
(iii) 1/2 the amount applicable under
clause (i) (after adjustment, if any,
under subparagraph (C)) in the case of
subsections (c) and (d).
(C) Inflation adjustment.--In prescribing the
tables under subsection (f) which apply with
respect to taxable years beginning in calendar
years after 2003--
(i) the cost-of-living adjustment
shall be determined under subsection
(f)(3) by substituting ``2002'' for
``2016'' in subparagraph (A)(ii)
thereof, and
(ii) the adjustments under clause (i)
shall not apply to the amount referred
to in subparagraph (B)(iii).
If any amount after adjustment under the
preceding sentence is not a multiple of $50,
such amount shall be rounded to the next lowest
multiple of $50.
(2) 25-, 28-, and 33-percent rate brackets.--The
tables under subsections (a), (b), (c), (d), and (e)
shall be applied--
(A) by substituting ``25%'' for ``28%'' each
place it appears (before the application of
subparagraph (B)),
(B) by substituting ``28%'' for ``31%'' each
place it appears, and
(C) by substituting ``33%'' for ``36%'' each
place it appears.
(3) Modifications to income tax brackets for high-
income taxpayers.--
(A) 35-percent rate bracket.--In the case of
taxable years beginning after December 31,
2012--
(i) the rate of tax under subsections
(a), (b), (c), and (d) on a taxpayer's
taxable income in the highest rate
bracket shall be 35 percent to the
extent such income does not exceed an
amount equal to the excess of--
(I) the applicable threshold,
over
(II) the dollar amount at
which such bracket begins, and
(ii) the 39.6 percent rate of tax
under such subsections shall apply only
to the taxpayer's taxable income in
such bracket in excess of the amount to
which clause (i) applies.
(B) Applicable threshold.--For purposes of
this paragraph, the term ``applicable
threshold'' means--
(i) $450,000 in the case of
subsection (a),
(ii) $425,000 in the case of
subsection (b),
(iii) $400,000 in the case of
subsection (c), and
(iv) 1/2 the amount applicable under
clause (i) (after adjustment, if any,
under subparagraph (C)) in the case of
subsection (d).
(C) Inflation adjustment.--For purposes of
this paragraph, with respect to taxable years
beginning in calendar years after 2013, each of
the dollar amounts under clauses (i), (ii), and
(iii) of subparagraph (B) shall be adjusted in
the same manner as under paragraph (1)(C)(i),
except that subsection (f)(3)(A)(ii) shall be
applied by substituting ``2012'' for ``2016''.
(4) Adjustment of tables.--The Secretary shall adjust
the tables prescribed under subsection (f) to carry out
this subsection.
(j) Modifications for taxable years 2018 through 2025.--
(1) In general.--In the case of a taxable year
beginning after December 31, 2017, and before January
1, 2026--
(A) subsection (i) shall not apply, and
(B) this section (other than subsection (i))
shall be applied as provided in paragraphs (2)
through (6).
(2) Rate tables.--
(A) Married individuals filing joint returns
and surviving spouses.--The following table
shall be applied in lieu of the table contained
in subsection (a):
(B) Heads of households.--The following table
shall be applied in lieu of the table contained
in subsection (b):
(C) Unmarried individuals other than
surviving spouses and heads of households.--The
following table shall be applied in lieu of the
table contained in subsection (c):
(D) Married individuals filing separate
returns.--The following table shall be applied
in lieu of the table contained in subsection
(d):
(E) Estates and trusts.--The following table
shall be applied in lieu of the table contained
in subsection (e):
(F) References to rate tables.--Any reference
in this title to a rate of tax under subsection
(c) shall be treated as a reference to the
corresponding rate bracket under subparagraph
(C) of this paragraph, except that the
reference in section 3402(q)(1) to the third
lowest rate of tax applicable under subsection
(c) shall be treated as a reference to the
fourth lowest rate of tax under subparagraph
(C).
(3) Adjustments.--
(A) No adjustment in 2018.--The tables
contained in paragraph (2) shall apply without
adjustment for taxable years beginning after
December 31, 2017, and before January 1, 2019.
(B) Subsequent years.--For taxable years
beginning after December 31, 2018, the
Secretary shall prescribe tables which shall
apply in lieu of the tables contained in
paragraph (2) in the same manner as under
paragraphs (1) and (2) of subsection (f)
(applied without regard to clauses (i) and (ii)
of subsection (f)(2)(A)), except that in
prescribing such tables--
(i) subsection (f)(3) shall be
applied by substituting ``calendar year
2017'' for ``calendar year 2016'' in
subparagraph (A)(ii) thereof,
(ii) subsection (f)(7)(B) shall apply
to any unmarried individual other than
a surviving spouse or head of
household, and
(iii) subsection (f)(8) shall not
apply.
(4) Special rules for certain children with unearned
income.--
(A) In general.--In the case of a child to
whom subsection (g) applies for the taxable
year, the rules of subparagraphs (B) and (C)
shall apply in lieu of the rule under
subsection (g)(1).
(B) Modifications to applicable rate
brackets.--In determining the amount of tax
imposed by this section for the taxable year on
a child described in subparagraph (A), the
income tax table otherwise applicable under
this subsection to the child shall be applied
with the following modifications:
(i) 24-percent bracket.--The maximum
taxable income which is taxed at a rate
below 24 percent shall not be more than
the sum of--
(I) the earned taxable income
of such child, plus
(II) the minimum taxable
income for the 24-percent
bracket in the table under
paragraph (2)(E) (as adjusted
under paragraph (3)) for the
taxable year.
(ii) 35-percent bracket.--The maximum
taxable income which is taxed at a rate
below 35 percent shall not be more than
the sum of--
(I) the earned taxable income
of such child, plus
(II) the minimum taxable
income for the 35-percent
bracket in the table under
paragraph (2)(E) (as adjusted
under paragraph (3)) for the
taxable year.
(iii) 37-percent bracket.--The
maximum taxable income which is taxed
at a rate below 37 percent shall not be
more than the sum of--
(I) the earned taxable income
of such child, plus
(II) the minimum taxable
income for the 37-percent
bracket in the table under
paragraph (2)(E) (as adjusted
under paragraph (3)) for the
taxable year.
(C) Coordination with capital gains rates.--
For purposes of applying section 1(h) (after
the modifications under paragraph (5)(A))--
(i) the maximum zero rate amount
shall not be more than the sum of--
(I) the earned taxable income
of such child, plus
(II) the amount in effect
under paragraph (5)(B)(i)(IV)
for the taxable year, and
(ii) the maximum 15-percent rate
amount shall not be more than the sum
of--
(I) the earned taxable income
of such child, plus
(II) the amount in effect
under paragraph (5)(B)(ii)(IV)
for the taxable year.
(D) Earned taxable income.--For purposes of
this paragraph, the term ``earned taxable
income'' means, with respect to any child for
any taxable year, the taxable income of such
child reduced (but not below zero) by the net
unearned income (as defined in subsection
(g)(4)) of such child.
(5) Application of current income tax brackets to
capital gains brackets.--
(A) In general.--Section 1(h)(1) shall be
applied--
(i) by substituting ``below the
maximum zero rate amount'' for ``which
would (without regard to this
paragraph) be taxed at a rate below 25
percent'' in subparagraph (B)(i), and
(ii) by substituting ``below the
maximum 15-percent rate amount'' for
``which would (without regard to this
paragraph) be taxed at a rate below
39.6 percent'' in subparagraph
(C)(ii)(I).
(B) Maximum amounts defined.--For purposes of
applying section 1(h) with the modifications
described in subparagraph (A)--
(i) Maximum zero rate amount.--The
maximum zero rate amount shall be--
(I) in the case of a joint
return or surviving spouse,
$77,200,
(II) in the case of an
individual who is a head of
household (as defined in
section 2(b)), $51,700,
(III) in the case of any
other individual (other than an
estate or trust), an amount
equal to 1/2 of the amount in
effect for the taxable year
under subclause (I), and
(IV) in the case of an estate
or trust, $2,600.
(ii) Maximum 15-percent rate
amount.--The maximum 15-percent rate
amount shall be--
(I) in the case of a joint
return or surviving spouse,
$479,000 (1/2 such amount in
the case of a married
individual filing a separate
return),
(II) in the case of an
individual who is the head of a
household (as defined in
section 2(b)), $452,400,
(III) in the case of any
other individual (other than an
estate or trust), $425,800, and
(IV) in the case of an estate
or trust, $12,700.
(C) Inflation adjustment.--In the case of any
taxable year beginning after 2018, each of the
dollar amounts in clauses (i) and (ii) of
subparagraph (B) shall be increased by an
amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
determined under subsection (f)(3) for
the calendar year in which the taxable
year begins, determined by substituting
``calendar year 2017'' for ``calendar
year 2016'' in subparagraph (A)(ii)
thereof.
If any increase under this subparagraph is not
a multiple of $50, such increase shall be
rounded to the next lowest multiple of $50.
(6) Section 15 not to apply.--Section 15 shall not
apply to any change in a rate of tax by reason of this
subsection.
SEC. 2. DEFINITIONS AND SPECIAL RULES.
(a) Definition of surviving spouse.--
(1) In general.--For purposes of section 1, the term
``surviving spouse'' means a taxpayer--
(A) whose spouse died during either of [his
two taxable years] the taxpayer's two taxable
years immediately preceding the taxable year,
and
(B) who maintains as [his home] the
taxpayer's home a household which constitutes
for the taxable year the principal place of
abode (as a member of such household) of a
dependent (i) who (within the meaning of
section 152, determined without regard to
subsections (b)(1), (b)(2), and (d)(1)(B)
thereof) is a son, stepson, daughter, or
stepdaughter of the taxpayer, and (ii) with
respect to whom the taxpayer is entitled to a
deduction for the taxable year under section
151.
For purposes of this paragraph, an individual shall be
considered as maintaining a household only if over half
of the cost of maintaining the household during the
taxable year is furnished by such individual.
(2) Limitations.--Notwithstanding paragraph (1), for
purposes of section 1 a taxpayer shall not be
considered to be a surviving spouse--
(A) if the taxpayer has remarried at any time
before the close of the taxable year, or
(B) unless, for the taxpayer's taxable year
during which [his spouse] the taxpayer's spouse
died, a joint return could have been made under
the provisions of section 6013 (without regard
to subsection (a)(3) thereof).
(3) Special rule where deceased spouse was in missing
status.--If an individual was in a missing status
(within the meaning of section 6013(f)(3)) as a result
of service in a combat zone (as determined for purposes
of section 112) and if such individual remains in such
status until the date referred to in subparagraph (A)
or (B), then, for purposes of paragraph (1)(A), the
date on which such individual died shall be treated as
the earlier of the date determined under subparagraph
(A) or the date determined under subparagraph (B):
(A) the date on which the determination is
made under section 556 of title 37 of the
United States Code or under section 5566 of
title 5 of such Code (whichever is applicable)
that such individual died while in such missing
status, or
(B) except in the case of the combat zone
designated for purposes of the Vietnam
conflict, the date which is 2 years after the
date designated under section 112 as the date
of termination of combatant activities in that
zone.
(b) Definition of head of household.--
(1) In general.--For purposes of this subtitle, an
individual shall be considered a head of a household
if, and only if, such individual is not married at the
close of his taxable year, is not a surviving spouse
(as defined in subsection (a)), and either--
(A) maintains as his home a household which
constitutes for more than one-half of such
taxable year the principal place of abode, as a
member of such household, of--
(i) a qualifying child of the
individual (as defined in section
152(c), determined without regard to
section 152(e)), but not if such
child--
(I) is married at the close
of the taxpayer's taxable year,
and
(II) is not a dependent of
such individual by reason of
section 152(b)(2) or 152(b)(3),
or both, or
(ii) any other person who is a
dependent of the taxpayer, if the
taxpayer is entitled to a deduction for
the taxable year for such person under
section 151, or
(B) maintains a household which constitutes
for such taxable year the principal place of
abode of the father or mother of the taxpayer,
if the taxpayer is entitled to a deduction for
the taxable year for such father or mother
under section 151.
For purposes of this paragraph, an individual shall be
considered as maintaining a household only if over half
of the cost of maintaining the household during the
taxable year is furnished by such individual.
(2) Determination of status.--For purposes of this
subsection--
(A) an individual who is legally separated
from [his spouse] the individual's spouse under
a decree of divorce or of separate maintenance
shall not be considered as married;
(B) a taxpayer shall be considered as not
married at the close of [his taxable year] the
taxpayer's taxable year if at any time during
the taxable year [his spouse] the taxpayer's
spouse is a nonresident alien; and
(C) a taxpayer shall be considered as married
at the close of [his taxable year] the
taxpayer's taxable year if [his spouse] the
taxpayer's spouse (other than a spouse
described in subparagraph (B)) died during the
taxable year.
(3) Limitations.--Notwithstanding paragraph (1), for
purposes of this subtitle a taxpayer shall not be
considered to be a head of a household--
(A) if at any time during the taxable year he
is a nonresident alien; or
(B) by reason of an individual who would not
be a dependent for the taxable year but for--
(i) subparagraph (H) of section
152(d)(2), or
(ii) paragraph (3) of section 152(d).
(c) Certain married individuals living apart.--For purposes
of this part, an individual shall be treated as not married at
the close of the taxable year if such individual is so treated
under the provisions of section 7703(b).
(d) Nonresident aliens.--In the case of a nonresident alien
individual, the taxes imposed by sections 1 and 55 shall apply
only as provided by section 871 or 877.
(e) Cross reference.--For definition of taxable income, see
section 63.
* * * * * * *
PART IV--CREDITS AGAINST TAX
* * * * * * *
Subpart A--NONREFUNDABLE PERSONAL CREDITS
* * * * * * *
SEC. 21. EXPENSES FOR HOUSEHOLD AND DEPENDENT CARE SERVICES NECESSARY
FOR GAINFUL EMPLOYMENT.
(a) Allowance of credit.--
(1) In general.--In the case of an individual for
which there are 1 or more qualifying individuals (as
defined in subsection (b)(1)) with respect to such
individual, there shall be allowed as a credit against
the tax imposed by this chapter for the taxable year an
amount equal to the applicable percentage of the
employment-related expenses (as defined in subsection
(b)(2)) paid by such individual during the taxable
year.
(2) Applicable percentage defined.--For purposes of
paragraph (1), the term ``applicable percentage'' means
35 percent reduced (but not below 20 percent) by 1
percentage point for each $2,000 (or fraction thereof)
by which the taxpayer's adjusted gross income for the
taxable year exceeds $15,000.
(b) Definitions of qualifying individual and employment-
related expenses.--For purposes of this section--
(1) Qualifying individual.--The term ``qualifying
individual'' means--
(A) a dependent of the taxpayer (as defined
in section 152(a)(1)) who has not attained age
13,
(B) a dependent of the taxpayer (as defined
in section 152, determined without regard to
subsections (b)(1), (b)(2), and (d)(1)(B)) who
is physically or mentally incapable of caring
for himself or herself and who has the same
principal place of abode as the taxpayer for
more than one-half of such taxable year, or
(C) the spouse of the taxpayer, if the spouse
is physically or mentally incapable of caring
for himself or herself and who has the same
principal place of abode as the taxpayer for
more than one-half of such taxable year.
(2) Employment-related expenses.--
(A) In general.--The term ``employment-
related expenses'' means amounts paid for the
following expenses, but only if such expenses
are incurred to enable the taxpayer to be
gainfully employed for any period for which
there are 1 or more qualifying individuals with
respect to the taxpayer:
(i) expenses for household services,
and
(ii) expenses for the care of a
qualifying individual.
Such term shall not include any amount paid for
services outside the taxpayer's household at a
camp where the qualifying individual stays
overnight.
(B) Exception.--Employment-related expenses
described in subparagraph (A) which are
incurred for services outside the taxpayer's
household shall be taken into account only if
incurred for the care of--
(i) a qualifying individual described
in paragraph (1)(A), or
(ii) a qualifying individual (not
described in paragraph (1)(A)) who
regularly spends at least 8 hours each
day in the taxpayer's household.
(C) Dependent care centers.--Employment-
related expenses described in subparagraph (A)
which are incurred for services provided
outside the taxpayer's household by a dependent
care center (as defined in subparagraph (D))
shall be taken into account only if--
(i) such center complies with all
applicable laws and regulations of a
State or unit of local government, and
(ii) the requirements of subparagraph
(B) are met.
(D) Dependent care center defined.--For
purposes of this paragraph, the term
``dependent care center'' means any facility
which--
(i) provides care for more than six
individuals (other than individuals who
reside at the facility), and
(ii) receives a fee, payment, or
grant for providing services for any of
the individuals (regardless of whether
such facility is operated for profit).
(c) Dollar limit on amount creditable.--The amount of the
employment-related expenses incurred during any taxable year
which may be taken into account under subsection (a) shall not
exceed--
(1) $3,000 if there is 1 qualifying individual with
respect to the taxpayer for such taxable year, or
(2) $6,000 if there are 2 or more qualifying
individuals with respect to the taxpayer for such
taxable year.
The amount determined under paragraph (1) or (2) (whichever is
applicable) shall be reduced by the aggregate amount excludable
from gross income under section 129 for the taxable year.
(d) Earned income limitation.--
(1) In general.--Except as otherwise provided in this
subsection, the amount of the employment-related
expenses incurred during any taxable year which may be
taken into account under subsection (a) shall not
exceed--
(A) in the case of an individual who is not
married at the close of such year, such
individual's earned income for such year, or
(B) in the case of an individual who is
married at the close of such year, the lesser
of such individual's earned income or the
earned income of [his spouse] the individual's
spouse for such year.
(2) Special rule for spouse who is a student or
incapable of caring for [himself] self.--In the case of
a spouse who is a student or a qualifying individual
described in subsection (b)(1)(C), for purposes of
paragraph (1), such spouse shall be deemed for each
month during which such spouse is a full-time student
at an educational institution, or is such a qualifying
individual, to be gainfully employed and to have earned
income of not less than--
(A) $250 if subsection (c)(1) applies for the
taxable year, or
(B) $500 if subsection (c)(2) applies for the
taxable year.
In the case of [any husband and wife] any married
couple, this paragraph shall apply with respect to only
one spouse for any one month.
(e) Special rules.--For purposes of this section--
(1) Place of abode.--An individual shall not be
treated as having the same principal place of abode of
the taxpayer if at any time during the taxable year of
the taxpayer the relationship between the individual
and the taxpayer is in violation of local law.
(2) Married couples must file joint return.--If the
taxpayer is married at the close of the taxable year,
the credit shall be allowed under subsection (a) only
if the taxpayer and [his spouse] the taxpayer's spouse
file a joint return for the taxable year.
(3) Marital status.--An individual legally separated
from [his spouse] the individual's spouse under a
decree of divorce or of separate maintenance shall not
be considered as married.
(4) Certain married individuals living apart.--If--
(A) an individual who is married and who
files a separate return--
(i) maintains as [his home] the
individual's home a household which
constitutes for more than one-half of
the taxable year the principal place of
abode of a qualifying individual, and
(ii) furnishes over half of the cost
of maintaining such household during
the taxable year, and
(B) during the last 6 months of such taxable
year such individual's spouse is not a member
of such household,
such individual shall not be considered as married.
(5) Special dependency test in case of divorced
parents, etc..--If--
(A) section 152(e) applies to any child with
respect to any calendar year, and
(B) such child is under the age of 13 or is
physically or mentally incapable of caring for
himself,
in the case of any taxable year beginning in such
calendar year, such child shall be treated as a
qualifying individual described in subparagraph (A) or
(B) of subsection (b)(1) (whichever is appropriate)
with respect to the custodial parent (as defined in
section 152(e)(4)(A)), and shall not be treated as a
qualifying individual with respect to the noncustodial
parent.
(6) Payments to related individuals.--No credit shall
be allowed under subsection (a) for any amount paid by
the taxpayer to an individual--
(A) with respect to whom, for the taxable
year, a deduction under section 151(c)
(relating to deduction for personal exemptions
for dependents) is allowable either to the
taxpayer or [his spouse] the taxpayer's spouse,
or
(B) who is a child of the taxpayer (within
the meaning of section 152(f)(1)) who has not
attained the age of 19 at the close of the
taxable year.
For purposes of this paragraph, the term ``taxable
year'' means the taxable year of the taxpayer in which
the service is performed.
(7) Student.--The term ``student'' means an
individual who during each of 5 calendar months during
the taxable year is a full-time student at an
educational organization.
(8) Educational organization.--The term ``educational
organization'' means an educational organization
described in section 170(b)(1)(A)(ii).
(9) Identifying information required with respect to
service provider.--No credit shall be allowed under
subsection (a) for any amount paid to any person
unless--
(A) the name, address, and taxpayer
identification number of such person are
included on the return claiming the credit, or
(B) if such person is an organization
described in section 501(c)(3) and exempt from
tax under section 501(a), the name and address
of such person are included on the return
claiming the credit.
In the case of a failure to provide the information
required under the preceding sentence, the preceding
sentence shall not apply if it is shown that the
taxpayer exercised due diligence in attempting to
provide the information so required.
(10) Identifying information required with respect to
qualifying individuals.--No credit shall be allowed
under this section with respect to any qualifying
individual unless the TIN of such individual is
included on the return claiming the credit.
(f) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this section.
SEC. 22. CREDIT FOR THE ELDERLY AND THE PERMANENTLY AND TOTALLY
DISABLED.
(a) General rule.--In the case of a qualified individual,
there shall be allowed as a credit against the tax imposed by
this chapter for the taxable year an amount equal to 15 percent
of such individual's section 22 amount for such taxable year.
(b) Qualified individual.--For purposes of this section, the
term ``qualified individual'' means any individual--
(1) who has attained age 65 before the close of the
taxable year, or
(2) who retired on disability before the close of the
taxable year and who, when he retired, was permanently
and totally disabled.
(c) Section 22 amount.--For purposes of subsection (a)--
(1) In general.--An individual's section 22 amount
for the taxable year shall be the applicable initial
amount determined under paragraph (2), reduced as
provided in paragraph (3) and in subsection (d).
(2) Initial amount.--
(A) In general.--Except as provided in
subparagraph (B), the initial amount shall be--
(i) $5,000 in the case of a single
individual, or a joint return where
only one spouse is a qualified
individual,
(ii) $7,500 in the case of a joint
return where both spouses are qualified
individuals, or
(iii) $3,750 in the case of a married
individual filing a separate return.
(B) Limitation in case of individuals who
have not attained age 65.--
(i) In general.--In the case of a
qualified individual who has not
attained age 65 before the close of the
taxable year, except as provided in
clause (ii), the initial amount shall
not exceed the disability income for
the taxable year.
(ii) Special rules in case of joint
return.--In the case of a joint return
where both spouses are qualified
individuals and at least one spouse has
not attained age 65 before the close of
the taxable year--
(I) if both spouses have not
attained age 65 before the
close of the taxable year, the
initial amount shall not exceed
the sum of such spouses'
disability income, or
(II) if one spouse has
attained age 65 before the
close of the taxable year, the
initial amount shall not exceed
the sum of $5,000 plus the
disability income for the
taxable year of the spouse who
has not attained age 65 before
the close of the taxable year.
(iii) Disability income.--For
purposes of this subparagraph, the term
``disability income'' means the
aggregate amount includable in the
gross income of the individual for the
taxable year under section 72 or 105(a)
to the extent such amount constitutes
wages (or payments in lieu of wages)
for the period during which the
individual is absent from work on
account of permanent and total
disability.
(3) Reduction.--
(A) In general.--The reduction under this
paragraph is an amount equal to the sum of the
amounts received by the individual (or, in the
case of a joint return, by either spouse) as a
pension or annuity or as a disability benefit--
(i) which is excluded from gross
income and payable under--
(I) title II of the Social
Security Act,
(II) the Railroad Retirement
Act of 1974, or
(III) a law administered by
the Department of Veterans
Affairs, or
(ii) which is excluded from gross
income under any provision of law not
contained in this title.
No reduction shall be made under clause
(i)(III) for any amount described in section
104(a)(4).
(B) Treatment of certain workmen's
compensation benefits.--For purposes of
subparagraph (A), any amount treated as a
social security benefit under section 86(d)(3)
shall be treated as a disability benefit
received under title II of the Social Security
Act.
(d) Adjusted gross income limitation.--If the adjusted gross
income of the taxpayer exceeds--
(1) $7,500 in the case of a single individual,
(2) $10,000 in the case of a joint return, or
(3) $5,000 in the case of a married individual filing
a separate return,
the section 22 amount shall be reduced by one-half of the
excess of the adjusted gross income over $7,500, $10,000, or
$5,000, as the case may be.
(e) Definitions and special rules.--For purposes of this
section--
(1) Married couple must file joint return.--Except in
the case of a [husband and wife who live] married
couple who lives apart at all times during the taxable
year, if the taxpayer is married at the close of the
taxable year, the credit provided by this section shall
be allowed only if [the taxpayer and his spouse] the
taxpayer and the spouse of the taxpayer file a joint
return for the taxable year.
(2) Marital status.--Marital status shall be
determined under section 7703.
(3) Permanent and total disability defined.--An
individual is permanently and totally disabled if he is
unable to engage in any substantial gainful activity by
reason of any medically determinable physical or mental
impairment which can be expected to result in death or
which has lasted or can be expected to last for a
continuous period of not less than 12 months. An
individual shall not be considered to be permanently
and totally disabled unless he furnishes proof of the
existence thereof in such form and manner, and at such
times, as the Secretary may require.
(f) Nonresident alien ineligible for credit.--No credit shall
be allowed under this section to any nonresident alien.
* * * * * * *
Subpart C--REFUNDABLE CREDITS
* * * * * * *
SEC. 36. FIRST-TIME HOMEBUYER CREDIT.
(a) Allowance of credit.--In the case of an individual who is
a first-time homebuyer of a principal residence in the United
States during a taxable year, there shall be allowed as a
credit against the tax imposed by this subtitle for such
taxable year an amount equal to 10 percent of the purchase
price of the residence.
(b) Limitations.--
(1) Dollar limitation.--
(A) In general.--Except as otherwise provided
in this paragraph, the credit allowed under
subsection (a) shall not exceed $8,000.
(B) Married individuals filing separately.--
In the case of a married individual filing a
separate return, subparagraph (A) shall be
applied by substituting ``$4,000'' for
``$8,000''.
(C) Other individuals.--If two or more
individuals who are not married purchase a
principal residence, the amount of the credit
allowed under subsection (a) shall be allocated
among such individuals in such manner as the
Secretary may prescribe, except that the total
amount of the credits allowed to all such
individuals shall not exceed $8,000.
(D) Special rule for long-time residents of
same principal residence.--In the case of a
taxpayer to whom a credit under subsection (a)
is allowed by reason of subsection (c)(6),
subparagraphs (A), (B), and (C) shall be
applied by substituting ``$6,500'' for
``$8,000'' and ``$3,250'' for ``$4,000''.
(2) Limitation based on modified adjusted gross
income.--
(A) In general.--The amount allowable as a
credit under subsection (a) (determined without
regard to this paragraph) for the taxable year
shall be reduced (but not below zero) by the
amount which bears the same ratio to the amount
which is so allowable as--
(i) the excess (if any) of--
(I) the taxpayer's modified
adjusted gross income for such
taxable year, over
(II) $125,000 ($225,000 in
the case of a joint return),
bears to
(ii) $20,000.
(B) Modified adjusted gross income.--For
purposes of subparagraph (A), the term
``modified adjusted gross income'' means the
adjusted gross income of the taxpayer for the
taxable year increased by any amount excluded
from gross income under section 911, 931, or
933.
(3) Limitation based on purchase price.--No credit
shall be allowed under subsection (a) for the purchase
of any residence if the purchase price of such
residence exceeds $800,000.
(4) Age limitation.--No credit shall be allowed under
subsection (a) with respect to the purchase of any
residence unless the taxpayer has attained age 18 as of
the date of such purchase. In the case of any taxpayer
who is married (within the meaning of section 7703),
the taxpayer shall be treated as meeting the age
requirement of the preceding sentence if the taxpayer
or the taxpayer's spouse meets such age requirement.
(c) Definitions.--For purposes of this section--
(1) First-time homebuyer.--The term ``first-time
homebuyer'' means any individual if such individual
(and if married, such individual's spouse) had no
present ownership interest in a principal residence
during the 3-year period ending on the date of the
purchase of the principal residence to which this
section applies.
(2) Principal residence.--The term ``principal
residence'' has the same meaning as when used in
section 121.
(3) Purchase.--
(A) In general.--The term ``purchase'' means
any acquisition, but only if--
(i) the property is not acquired from
a person related to the person
acquiring such property (or, if
married, such individual's spouse), and
(ii) the basis of the property in the
hands of the person acquiring such
property is not determined--
(I) in whole or in part by
reference to the adjusted basis
of such property in the hands
of the person from whom
acquired, or
(II) under section 1014(a)
(relating to property acquired
from a decedent).
(B) Construction.--A residence which is
constructed by the taxpayer shall be treated as
purchased by the taxpayer on the date the
taxpayer first occupies such residence.
(4) Purchase price.--The term ``purchase price''
means the adjusted basis of the principal residence on
the date such residence is purchased.
(5) Related persons.--A person shall be treated as
related to another person if the relationship between
such persons would result in the disallowance of losses
under section 267 or 707(b) (but, in applying section
267(b) and (c) for purposes of this section, paragraph
(4) of section 267(c) shall be treated as providing
that the family of an individual shall include only
[his spouse] the individual's spouse , ancestors, and
lineal descendants).
(6) Exception for long-time residents of same
principal residence.--In the case of an individual
(and, if married, such individual's spouse) who has
owned and used the same residence as such individual's
principal residence for any 5-consecutive-year period
during the 8-year period ending on the date of the
purchase of a subsequent principal residence, such
individual shall be treated as a first-time homebuyer
for purposes of this section with respect to the
purchase of such subsequent residence.
(d) Exceptions.--No credit under subsection (a) shall be
allowed to any taxpayer for any taxable year with respect to
the purchase of a residence if--
(1) the taxpayer is a nonresident alien,
(2) the taxpayer disposes of such residence (or such
residence ceases to be the principal residence of the
taxpayer (and, if married, the taxpayer's spouse))
before the close of such taxable year,
(3) a deduction under section 151 with respect to
such taxpayer is allowable to another taxpayer for such
taxable year, or
(4) the taxpayer fails to attach to the return of tax
for such taxable year a properly executed copy of the
settlement statement used to complete such purchase.
(e) Reporting.--If the Secretary requires information
reporting under section 6045 by a person described in
subsection (e)(2) thereof to verify the eligibility of
taxpayers for the credit allowable by this section, the
exception provided by section 6045(e) shall not apply.
(f) Recapture of credit.--
(1) In general.--Except as otherwise provided in this
subsection, if a credit under subsection (a) is allowed
to a taxpayer, the tax imposed by this chapter shall be
increased by 62/3 percent of the amount of such credit
for each taxable year in the recapture period.
(2) Acceleration of recapture.--If a taxpayer
disposes of the principal residence with respect to
which a credit was allowed under subsection (a) (or
such residence ceases to be the principal residence of
the taxpayer (and, if married, the taxpayer's spouse))
before the end of the recapture period--
(A) the tax imposed by this chapter for the
taxable year of such disposition or cessation
shall be increased by the excess of the amount
of the credit allowed over the amounts of tax
imposed by paragraph (1) for preceding taxable
years, and
(B) paragraph (1) shall not apply with
respect to such credit for such taxable year or
any subsequent taxable year.
(3) Limitation based on gain.--In the case of the
sale of the principal residence to a person who is not
related to the taxpayer, the increase in tax determined
under paragraph (2) shall not exceed the amount of gain
(if any) on such sale. Solely for purposes of the
preceding sentence, the adjusted basis of such
residence shall be reduced by the amount of the credit
allowed under subsection (a) to the extent not
previously recaptured under paragraph (1).
(4) Exceptions.--
(A) Death of taxpayer.--Paragraphs (1) and
(2) shall not apply to any taxable year ending
after the date of the taxpayer's death.
(B) Involuntary conversion.--Paragraph (2)
shall not apply in the case of a residence
which is compulsorily or involuntarily
converted (within the meaning of section
1033(a)) if the taxpayer acquires a new
principal residence during the 2-year period
beginning on the date of the disposition or
cessation referred to in paragraph (2).
Paragraph (2) shall apply to such new principal
residence during the recapture period in the
same manner as if such new principal residence
were the converted residence.
(C) Transfers between spouses or incident to
divorce.--In the case of a transfer of a
residence to which section 1041(a) applies--
(i) paragraph (2) shall not apply to
such transfer, and
(ii) in the case of taxable years
ending after such transfer, paragraphs
(1) and (2) shall apply to the
transferee in the same manner as if
such transferee were the transferor
(and shall not apply to the
transferor).
(D) Waiver of recapture for purchases in 2009
and 2010.--In the case of any credit allowed
with respect to the purchase of a principal
residence after December 31, 2008--
(i) paragraph (1) shall not apply,
and
(ii) paragraph (2) shall apply only
if the disposition or cessation
described in paragraph (2) with respect
to such residence occurs during the 36-
month period beginning on the date of
the purchase of such residence by the
taxpayer.
(E) Special rule for members of the armed
forces, etc..--
(i) In general.--In the case of the
disposition of a principal residence by
an individual (or a cessation referred
to in paragraph (2)) after December 31,
2008, in connection with Government
orders received by such individual, or
such individual's spouse, for qualified
official extended duty service--
(I) paragraph (2) and
subsection (d)(2) shall not
apply to such disposition (or
cessation), and
(II) if such residence was
acquired before January 1,
2009, paragraph (1) shall not
apply to the taxable year in
which such disposition (or
cessation) occurs or any
subsequent taxable year.
(ii) Qualified official extended duty
service.--For purposes of this section,
the term ``qualified official extended
duty service'' means service on
qualified official extended duty as--
(I) a member of the uniformed
services,
(II) a member of the Foreign
Service of the United States,
or
(III) an employee of the
intelligence community.
(iii) Definitions.--Any term used in
this subparagraph which is also used in
paragraph (9) of section 121(d) shall
have the same meaning as when used in
such paragraph.
(5) Joint returns.--In the case of a credit allowed
under subsection (a) with respect to a joint return,
half of such credit shall be treated as having been
allowed to each individual filing such return for
purposes of this subsection.
(6) Return requirement.--If the tax imposed by this
chapter for the taxable year is increased under this
subsection, the taxpayer shall, notwithstanding section
6012, be required to file a return with respect to the
taxes imposed under this subtitle.
(7) Recapture period.--For purposes of this
subsection, the term ``recapture period'' means the 15
taxable years beginning with the second taxable year
following the taxable year in which the purchase of the
principal residence for which a credit is allowed under
subsection (a) was made.
(g) Election to treat purchase in prior year.--In the case of
a purchase of a principal residence after December 31, 2008, a
taxpayer may elect to treat such purchase as made on December
31 of the calendar year preceding such purchase for purposes of
this section (other than subsections (b)(4), (c), (f)(4)(D),
and (h)).
(h) Application of section.--
(1) In general.--This section shall only apply to a
principal residence purchased by the taxpayer on or
after April 9, 2008, and before May 1, 2010.
(2) Exception in case of binding contract.--In the
case of any taxpayer who enters into a written binding
contract before May 1, 2010, to close on the purchase
of a principal residence before July 1, 2010, and who
purchases such residence before October 1, 2010,
paragraph (1) shall be applied by substituting
``October 1, 2010'' for ``May 1, 2010''.
(3) Special rule for individuals on qualified
official extended duty outside the United States.--In
the case of any individual who serves on qualified
official extended duty service (as defined in section
121(d)(9)(C)(i)) outside the United States for at least
90 days during the period beginning after December 31,
2008, and ending before May 1, 2010, and, if married,
such individual's spouse--
(A) paragraphs (1) and (2) shall each be
applied by substituting ``May 1, 2011'' for
``May 1, 2010'', and
(B) paragraph (2) shall be applied by
substituting ``July 1, 2011'' for ``July 1,
2010'', and for ``October 1, 2010''.
* * * * * * *
SEC. 36B. REFUNDABLE CREDIT FOR COVERAGE UNDER A QUALIFIED HEALTH PLAN.
(a) In general.--In the case of an applicable taxpayer, there
shall be allowed as a credit against the tax imposed by this
subtitle for any taxable year an amount equal to the premium
assistance credit amount of the taxpayer for the taxable year.
(b) Premium assistance credit amount.--For purposes of this
section--
(1) In general.--The term ``premium assistance credit
amount'' means, with respect to any taxable year, the
sum of the premium assistance amounts determined under
paragraph (2) with respect to all coverage months of
the taxpayer occurring during the taxable year.
(2) Premium assistance amount.--The premium
assistance amount determined under this subsection with
respect to any coverage month is the amount equal to
the lesser of--
(A) the monthly premiums for such month for 1
or more qualified health plans offered in the
individual market within a State which cover
the taxpayer, the taxpayer's spouse, or any
dependent (as defined in section 152) of the
taxpayer and which were enrolled in through an
Exchange established by the State under 1311 of
the Patient Protection and Affordable Care Act,
or
(B) the excess (if any) of--
(i) the adjusted monthly premium for
such month for the applicable second
lowest cost silver plan with respect to
the taxpayer, over
(ii) an amount equal to 1/12 of the
product of the applicable percentage
and the taxpayer's household income for
the taxable year.
(3) Other terms and rules relating to premium
assistance amounts.--For purposes of paragraph (2)--
(A) Applicable percentage.--
(i) In general.--Except as provided
in clause (ii), the applicable
percentage for any taxable year shall
be the percentage such that the
applicable percentage for any taxpayer
whose household income is within an
income tier specified in the following
table shall increase, on a sliding
scale in a linear manner, from the
initial premium percentage to the final
premium percentage specified in such
table for such income tier:
(ii) Indexing.--
(I) In general.--Subject to
subclause (II), in the case of
taxable years beginning in any
calendar year after 2014, the
initial and final applicable
percentages under clause (i)
(as in effect for the preceding
calendar year after application
of this clause) shall be
adjusted to reflect the excess
of the rate of premium growth
for the preceding calendar year
over the rate of income growth
for the preceding calendar
year.
(II) Additional adjustment.--
Except as provided in subclause
(III), in the case of any
calendar year after 2018, the
percentages described in
subclause (I) shall, in
addition to the adjustment
under subclause (I), be
adjusted to reflect the excess
(if any) of the rate of premium
growth estimated under
subclause (I) for the preceding
calendar year over the rate of
growth in the consumer price
index for the preceding
calendar year.
(III) Failsafe.--Subclause
(II) shall apply for any
calendar year only if the
aggregate amount of premium tax
credits under this section and
cost-sharing reductions under
section 1402 of the Patient
Protection and Affordable Care
Act for the preceding calendar
year exceeds an amount equal to
0.504 percent of the gross
domestic product for the
preceding calendar year.
(B) Applicable second lowest cost silver
plan.--The applicable second lowest cost silver
plan with respect to any applicable taxpayer is
the second lowest cost silver plan of the
individual market in the rating area in which
the taxpayer resides which--
(i) is offered through the same
Exchange through which the qualified
health plans taken into account under
paragraph (2)(A) were offered, and
(ii) provides--
(I) self-only coverage in the
case of an applicable
taxpayer--
(aa) whose tax for
the taxable year is
determined under
section 1(c) (relating
to unmarried
individuals other than
surviving spouses and
heads of households)
and who is not allowed
a deduction under
section 151 for the
taxable year with
respect to a dependent,
or
(bb) who is not
described in item (aa)
but who purchases only
self-only coverage, and
(II) family coverage in the
case of any other applicable
taxpayer.
If a taxpayer files a joint return and no
credit is allowed under this section with
respect to 1 of the spouses by reason of
subsection (e), the taxpayer shall be treated
as described in clause (ii)(I) unless a
deduction is allowed under section 151 for the
taxable year with respect to a dependent other
than either spouse and subsection (e) does not
apply to the dependent.
(C) Adjusted monthly premium.--The adjusted
monthly premium for an applicable second lowest
cost silver plan is the monthly premium which
would have been charged (for the rating area
with respect to which the premiums under
paragraph (2)(A) were determined) for the plan
if each individual covered under a qualified
health plan taken into account under paragraph
(2)(A) were covered by such silver plan and the
premium was adjusted only for the age of each
such individual in the manner allowed under
section 2701 of the Public Health Service Act.
In the case of a State participating in the
wellness discount demonstration project under
section 2705(d) of the Public Health Service
Act, the adjusted monthly premium shall be
determined without regard to any premium
discount or rebate under such project.
(D) Additional benefits.--If--
(i) a qualified health plan under
section 1302(b)(5) of the Patient
Protection and Affordable Care Act
offers benefits in addition to the
essential health benefits required to
be provided by the plan, or
(ii) a State requires a qualified
health plan under section 1311(d)(3)(B)
of such Act to cover benefits in
addition to the essential health
benefits required to be provided by the
plan,
the portion of the premium for the plan
properly allocable (under rules prescribed by
the Secretary of Health and Human Services) to
such additional benefits shall not be taken
into account in determining either the monthly
premium or the adjusted monthly premium under
paragraph (2).
(E) Special rule for pediatric dental
coverage.--For purposes of determining the
amount of any monthly premium, if an individual
enrolls in both a qualified health plan and a
plan described in section 1311(d)(2)(B)(ii)(I)
of the Patient Protection and Affordable Care
Act for any plan year, the portion of the
premium for the plan described in such section
that (under regulations prescribed by the
Secretary) is properly allocable to pediatric
dental benefits which are included in the
essential health benefits required to be
provided by a qualified health plan under
section 1302(b)(1)(J) of such Act shall be
treated as a premium payable for a qualified
health plan.
(c) Definition and rules relating to applicable taxpayers,
coverage months, and qualified health plan.--For purposes of
this section--
(1) Applicable taxpayer.--
(A) In general.--The term ``applicable
taxpayer'' means, with respect to any taxable
year, a taxpayer whose household income for the
taxable year equals or exceeds 100 percent but
does not exceed 400 percent of an amount equal
to the poverty line for a family of the size
involved.
(B) Special rule for certain individuals
lawfully present in the United States.--If--
(i) a taxpayer has a household income
which is not greater than 100 percent
of an amount equal to the poverty line
for a family of the size involved, and
(ii) the taxpayer is an alien
lawfully present in the United States,
but is not eligible for the medicaid
program under title XIX of the Social
Security Act by reason of such alien
status,
the taxpayer shall, for purposes of the credit
under this section, be treated as an applicable
taxpayer with a household income which is equal
to 100 percent of the poverty line for a family
of the size involved.
(C) Married couples must file joint return.--
If the taxpayer is married (within the meaning
of section 7703) at the close of the taxable
year, the taxpayer shall be treated as an
applicable taxpayer only if the taxpayer and
the taxpayer's spouse file a joint return for
the taxable year.
(D) Denial of credit to dependents.--No
credit shall be allowed under this section to
any individual with respect to whom a deduction
under section 151 is allowable to another
taxpayer for a taxable year beginning in the
calendar year in which such individual's
taxable year begins.
(2) Coverage month.--For purposes of this
subsection--
(A) In general.--The term ``coverage month''
means, with respect to an applicable taxpayer,
any month if--
(i) as of the first day of such month
the taxpayer, the taxpayer's spouse, or
any dependent of the taxpayer is
covered by a qualified health plan
described in subsection (b)(2)(A) that
was enrolled in through an Exchange
established by the State under section
1311 of the Patient Protection and
Affordable Care Act, and
(ii) the premium for coverage under
such plan for such month is paid by the
taxpayer (or through advance payment of
the credit under subsection (a) under
section 1412 of the Patient Protection
and Affordable Care Act).
(B) Exception for minimum essential
coverage.--
(i) In general.--The term ``coverage
month'' shall not include any month
with respect to an individual if for
such month the individual is eligible
for minimum essential coverage other
than eligibility for coverage described
in section 5000A(f)(1)(C) (relating to
coverage in the individual market).
(ii) Minimum essential coverage.--The
term ``minimum essential coverage'' has
the meaning given such term by section
5000A(f).
(C) Special rule for employer-sponsored
minimum essential coverage.--For purposes of
subparagraph (B)--
(i) Coverage must be affordable.--
Except as provided in clause (iii), an
employee shall not be treated as
eligible for minimum essential coverage
if such coverage--
(I) consists of an eligible
employer-sponsored plan (as
defined in section
5000A(f)(2)), and
(II) the employee's required
contribution (within the
meaning of section
5000A(e)(1)(B)) with respect to
the plan exceeds 9.5 percent of
the applicable taxpayer's
household income.
This clause shall also apply to an individual
who is eligible to enroll in the plan by reason
of a relationship the individual bears to the
employee.
(ii) Coverage must provide minimum
value.--Except as provided in clause
(iii), an employee shall not be treated
as eligible for minimum essential
coverage if such coverage consists of
an eligible employer-sponsored plan (as
defined in section 5000A(f)(2)) and the
plan's share of the total allowed costs
of benefits provided under the plan is
less than 60 percent of such costs.
(iii) Employee or family must not be
covered under employer plan.--Clauses
(i) and (ii) shall not apply if the
employee (or any individual described
in the last sentence of clause (i)) is
covered under the eligible employer-
sponsored plan or the grandfathered
health plan.
(iv) Indexing.--In the case of plan
years beginning in any calendar year
after 2014, the Secretary shall adjust
the 9.5 percent under clause (i)(II) in
the same manner as the percentages are
adjusted under subsection
(b)(3)(A)(ii).
(3) Definitions and other rules.--
(A) Qualified health plan.--The term
``qualified health plan'' has the meaning given
such term by section 1301(a) of the Patient
Protection and Affordable Care Act, except that
such term shall not include a qualified health
plan which is a catastrophic plan described in
section 1302(e) of such Act.
(B) Grandfathered health plan.--The term
``grandfathered health plan'' has the meaning
given such term by section 1251 of the Patient
Protection and Affordable Care Act.
(4) Special rules for qualified small employer health
reimbursement arrangements.--
(A) In general.--The term ``coverage month''
shall not include any month with respect to an
employee (or any spouse or dependent of such
employee) if for such month the employee is
provided a qualified small employer health
reimbursement arrangement which constitutes
affordable coverage.
(B) Denial of double benefit.--In the case of
any employee who is provided a qualified small
employer health reimbursement arrangement for
any coverage month (determined without regard
to subparagraph (A)), the credit otherwise
allowable under subsection (a) to the taxpayer
for such month shall be reduced (but not below
zero) by the amount described in subparagraph
(C)(i)(II) for such month.
(C) Affordable coverage.--For purposes of
subparagraph (A), a qualified small employer
health reimbursement arrangement shall be
treated as constituting affordable coverage for
a month if--
(i) the excess of--
(I) the amount that would be
paid by the employee as the
premium for such month for
self-only coverage under the
second lowest cost silver plan
offered in the relevant
individual health insurance
market, over
(II) 1/
12 of the employee's
permitted benefit (as defined
in section 9831(d)(3)(C)) under
such arrangement, does not
exceed--
(ii) 1/12 of
9.5 percent of the employee's household
income.
(D) Qualified small employer health
reimbursement arrangement.--For purposes of
this paragraph, the term ``qualified small
employer health reimbursement arrangement'' has
the meaning given such term by section
9831(d)(2).
(E) Coverage for less than entire year.--In
the case of an employee who is provided a
qualified small employer health reimbursement
arrangement for less than an entire year,
subparagraph (C)(i)(II) shall be applied by
substituting ``the number of months during the
year for which such arrangement was provided''
for ``12''.
(F) Indexing.--In the case of plan years
beginning in any calendar year after 2014, the
Secretary shall adjust the 9.5 percent amount
under subparagraph (C)(ii) in the same manner
as the percentages are adjusted under
subsection (b)(3)(A)(ii).
(d) Terms relating to income and families.--For purposes of
this section--
(1) Family size.--The family size involved with
respect to any taxpayer shall be equal to the number of
individuals for whom the taxpayer is allowed a
deduction under section 151 (relating to allowance of
deduction for personal exemptions) for the taxable
year.
(2) Household income.--
(A) Household income.--The term ``household
income'' means, with respect to any taxpayer,
an amount equal to the sum of--
(i) the modified adjusted gross
income of the taxpayer, plus
(ii) the aggregate modified adjusted
gross incomes of all other individuals
who--
(I) were taken into account
in determining the taxpayer's
family size under paragraph
(1), and
(II) were required to file a
return of tax imposed by
section 1 for the taxable year.
(B) Modified adjusted gross income.--The term
``modified adjusted gross income'' means
adjusted gross income increased by--
(i) any amount excluded from gross
income under section 911,
(ii) any amount of interest received
or accrued by the taxpayer during the
taxable year which is exempt from tax,
and
(iii) an amount equal to the portion
of the taxpayer's social security
benefits (as defined in section 86(d))
which is not included in gross income
under section 86 for the taxable year.
(3) Poverty line.--
(A) In general.--The term ``poverty line''
has the meaning given that term in section
2110(c)(5) of the Social Security Act (42
U.S.C. 1397jj(c)(5)).
(B) Poverty line used.--In the case of any
qualified health plan offered through an
Exchange for coverage during a taxable year
beginning in a calendar year, the poverty line
used shall be the most recently published
poverty line as of the 1st day of the regular
enrollment period for coverage during such
calendar year.
(e) Rules for individuals not lawfully present.--
(1) In general.--If 1 or more individuals for whom a
taxpayer is allowed a deduction under section 151
(relating to allowance of deduction for personal
exemptions) for the taxable year (including the
taxpayer or [his spouse] the taxpayer's spouse ) are
individuals who are not lawfully present--
(A) the aggregate amount of premiums
otherwise taken into account under clauses (i)
and (ii) of subsection (b)(2)(A) shall be
reduced by the portion (if any) of such
premiums which is attributable to such
individuals, and
(B) for purposes of applying this section,
the determination as to what percentage a
taxpayer's household income bears to the
poverty level for a family of the size involved
shall be made under one of the following
methods:
(i) A method under which--
(I) the taxpayer's family
size is determined by not
taking such individuals into
account, and
(II) the taxpayer's household
income is equal to the product
of the taxpayer's household
income (determined without
regard to this subsection) and
a fraction--
(aa) the numerator of
which is the poverty
line for the taxpayer's
family size determined
after application of
subclause (I), and
(bb) the denominator
of which is the poverty
line for the taxpayer's
family size determined
without regard to
subclause (I).
(ii) A comparable method reaching the
same result as the method under clause
(i).
(2) Lawfully present.--For purposes of this section,
an individual shall be treated as lawfully present only
if the individual is, and is reasonably expected to be
for the entire period of enrollment for which the
credit under this section is being claimed, a citizen
or national of the United States or an alien lawfully
present in the United States.
(3) Secretarial authority.--The Secretary of Health
and Human Services, in consultation with the Secretary,
shall prescribe rules setting forth the methods by
which calculations of family size and household income
are made for purposes of this subsection. Such rules
shall be designed to ensure that the least burden is
placed on individuals enrolling in qualified health
plans through an Exchange and taxpayers eligible for
the credit allowable under this section.
(f) Reconciliation of credit and advance credit.--
(1) In general.--The amount of the credit allowed
under this section for any taxable year shall be
reduced (but not below zero) by the amount of any
advance payment of such credit under section 1412 of
the Patient Protection and Affordable Care Act.
(2) Excess advance payments.--
(A) In general.--If the advance payments to a
taxpayer under section 1412 of the Patient
Protection and Affordable Care Act for a
taxable year exceed the credit allowed by this
section (determined without regard to paragraph
(1)), the tax imposed by this chapter for the
taxable year shall be increased by the amount
of such excess.
(B) Limitation on increase.--
(i) In general.--In the case of a
taxpayer whose household income is less
than 400 percent of the poverty line
for the size of the family involved for
the taxable year, the amount of the
increase under subparagraph (A) shall
in no event exceed the applicable
dollar amount determined in accordance
with the following table (one-half of
such amount in the case of a taxpayer
whose tax is determined under section
1(c) for the taxable year):
(ii) Indexing of amount.--In the case
of any calendar year beginning after
2014, each of the dollar amounts in the
table contained under clause (i) shall
be increased by an amount equal to--
(I) such dollar amount,
multiplied by
(II) the cost-of-living
adjustment determined under
section 1(f)(3) for the
calendar year, determined by
substituting ``calendar year
2013'' for ``calendar year
2016'' in subparagraph (A)(ii)
thereof.
If the amount of any increase under clause (i)
is not a multiple of $50, such increase shall
be rounded to the next lowest multiple of $50.
(3) Information requirement.--Each Exchange (or any
person carrying out 1 or more responsibilities of an
Exchange under section 1311(f)(3) or 1321(c) of the
Patient Protection and Affordable Care Act) shall
provide the following information to the Secretary and
to the taxpayer with respect to any health plan
provided through the Exchange:
(A) The level of coverage described in
section 1302(d) of the Patient Protection and
Affordable Care Act and the period such
coverage was in effect.
(B) The total premium for the coverage
without regard to the credit under this section
or cost-sharing reductions under section 1402
of such Act.
(C) The aggregate amount of any advance
payment of such credit or reductions under
section 1412 of such Act.
(D) The name, address, and TIN of the primary
insured and the name and TIN of each other
individual obtaining coverage under the policy.
(E) Any information provided to the Exchange,
including any change of circumstances,
necessary to determine eligibility for, and the
amount of, such credit.
(F) Information necessary to determine
whether a taxpayer has received excess advance
payments.
(g) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the provisions of
this section, including regulations which provide for--
(1) the coordination of the credit allowed under this
section with the program for advance payment of the
credit under section 1412 of the Patient Protection and
Affordable Care Act, and
(2) the application of subsection (f) where the
filing status of the taxpayer for a taxable year is
different from such status used for determining the
advance payment of the credit.
* * * * * * *
Subpart D--BUSINESS RELATED CREDITS
* * * * * * *
SEC. 38. GENERAL BUSINESS CREDIT.
(a) Allowance of credit.--There shall be allowed as a credit
against the tax imposed by this chapter for the taxable year an
amount equal to the sum of--
(1) the business credit carryforwards carried to such
taxable year,
(2) the amount of the current year business credit,
plus
(3) the business credit carrybacks carried to such
taxable year.
(b) Current year business credit.--For purposes of this
subpart, the amount of the current year business credit is the
sum of the following credits determined for the taxable year:
(1) the investment credit determined under section
46,
(2) the work opportunity credit determined under
section 51(a),
(3) the alcohol fuels credit determined under section
40(a),
(4) the research credit determined under section
41(a),
(5) the low-income housing credit determined under
section 42(a),
(6) the enhanced oil recovery credit under section
43(a),
(7) in the case of an eligible small business (as
defined in section 44(b)), the disabled access credit
determined under section 44(a),
(8) the renewable electricity production credit under
section 45(a),
(9) the empowerment zone employment credit determined
under section 1396(a),
(10) the Indian employment credit as determined under
section 45A(a),
(11) the employer social security credit determined
under section 45B(a),
(12) the orphan drug credit determined under section
45C(a),
(13) the new markets tax credit determined under
section 45D(a),
(14) in the case of an eligible employer (as defined
in section 45E(c)), the small employer pension plan
startup cost credit determined under section 45E(a),
(15) the employer-provided child care credit
determined under section 45F(a),
(16) the railroad track maintenance credit determined
under section 45G(a),
(17) the biodiesel fuels credit determined under
section 40A(a),
(18) the low sulfur diesel fuel production credit
determined under section 45H(a),
(19) the marginal oil and gas well production credit
determined under section 45I(a),
(20) the distilled spirits credit determined under
section 5011(a),
(21) the advanced nuclear power facility production
credit determined under section 45J(a),
(22) the nonconventional source production credit
determined under section 45K(a),
(23) the new energy efficient home credit determined
under section 45L(a),
(24) the portion of the alternative motor vehicle
credit to which section 30B(g)(1) applies,
(25) the portion of the alternative fuel vehicle
refueling property credit to which section 30C(d)(1)
applies,
(26) the mine rescue team training credit determined
under section 45N(a),
(27) in the case of an eligible agricultural business
(as defined in section 45O(e)), the agricultural
chemicals security credit determined under section
45O(a),
(28) the differential wage payment credit determined
under section 45P(a),
(29) the carbon dioxide sequestration credit
determined under section 45Q(a),
(30) the portion of the new qualified plug-in
electric drive motor vehicle credit to which section
30D(c)(1) applies,
(31) the small employer health insurance credit
determined under section 45R, plus
(32) in the case of an eligible employer (as defined
in section 45S(c)), the paid family and medical leave
credit determined under section 45S(a).
(c) Limitation based on amount of tax.--
(1) In general.--The credit allowed under subsection
(a) for any taxable year shall not exceed the excess
(if any) of the taxpayer's net income tax over the
greater of--
(A) the tentative minimum tax for the taxable
year, or
(B) 25 percent of so much of the taxpayer's
net regular tax liability as exceeds $25,000.
For purposes of the preceding sentence, the term ``net
income tax'' means the sum of the regular tax liability
and the tax imposed by section 55, reduced by the
credits allowable under subparts A and B of this part,
and the term ``net regular tax liability'' means the
regular tax liability reduced by the sum of the credits
allowable under subparts A and B of this part.
(2) Empowerment zone employment credit may offset 25
percent of minimum tax.--
(A) In general.--In the case of the
empowerment zone employment credit--
(i) this section and section 39 shall
be applied separately with respect to
such credit, and
(ii) for purposes of applying
paragraph (1) to such credit--
(I) 75 percent of the
tentative minimum tax shall be
substituted for the tentative
minimum tax under subparagraph
(A) thereof, and
(II) the limitation under
paragraph (1) (as modified by
subclause (I)) shall be reduced
by the credit allowed under
subsection (a) for the taxable
year (other than the
empowerment zone employment
credit and the specified
credits).
(B) Empowerment zone employment credit.--For
purposes of this paragraph, the term
``empowerment zone employment credit'' means
the portion of the credit under subsection (a)
which is attributable to the credit determined
under section 1396 (relating to empowerment
zone employment credit).
(4) Special rules for specified credits.--
(A) In general.--In the case of specified
credits--
(i) this section and section 39 shall
be applied separately with respect to
such credits, and
(ii) in applying paragraph (1) to
such credits--
(I) the tentative minimum tax
shall be treated as being zero,
and
(II) the limitation under
paragraph (1) (as modified by
subclause (I)) shall be reduced
by the credit allowed under
subsection (a) for the taxable
year (other than the specified
credits).
(B) Specified credits.--For purposes of this
subsection, the term ``specified credits''
means--
(i) for taxable years beginning after
December 31, 2004, the credit
determined under section 40,
(ii) the credit determined under
section 41 for the taxable year with
respect to an eligible small business
(as defined in paragraph (5)(A) after
application of the rules of paragraph
(5)(B)),
(iii) the credit determined under
section 42 to the extent attributable
to buildings placed in service after
December 31, 2007,
(iv) the credit determined under
section 45 to the extent that such
credit is attributable to electricity
or refined coal produced--
(I) at a facility which is
originally placed in service
after the date of the enactment
of this paragraph, and
(II) during the 4-year period
beginning on the date that such
facility was originally placed
in service,
(v) the credit determined under
section 45 to the extent that such
credit is attributable to section
45(e)(10) (relating to Indian coal
production facilities),
(vi) the credit determined under
section 45B,
(vii) the credit determined under
section 45G,
(viii) the credit determined under
section 45R,
(ix) the credit determined under
section 45S,
(x) the credit determined under
section 46 to the extent that such
credit is attributable to the energy
credit determined under section 48,
(xi) the credit determined under
section 46 to the extent that such
credit is attributable to the
rehabilitation credit under section 47,
but only with respect to qualified
rehabilitation expenditures properly
taken into account for periods after
December 31, 2007, and
(xii) the credit determined under
section 51.
(5) Rules related to eligible small businesses.--
(A) Eligible small business.--For purposes of
this subsection, the term ``eligible small
business'' means, with respect to any taxable
year--
(i) a corporation the stock of which
is not publicly traded,
(ii) a partnership, or
(iii) a sole proprietorship,
if the average annual gross receipts of such
corporation, partnership, or sole
proprietorship for the 3-taxable-year period
preceding such taxable year does not exceed
$50,000,000. For purposes of applying the test
under the preceding sentence, rules similar to
the rules of paragraphs (2) and (3) of section
448(c) shall apply.
(B) Treatment of partners and S corporation
shareholders.--For purposes of paragraph
(4)(B)(ii), any credit determined under section
41 with respect to a partnership or S
corporation shall not be treated as a specified
credit by any partner or shareholder unless
such partner or shareholder meets the gross
receipts test under subparagraph (A) for the
taxable year in which such credit is treated as
a current year business credit.
(6) Special rules.--
(A) Married individuals.--In the case of a
[husband or wife who files] married individual
who files a separate return, the amount
specified under subparagraph (B) of paragraph
(1) shall be $12,500 in lieu of $25,000. This
subparagraph shall not apply if the spouse of
the taxpayer has no business credit
carryforward or carryback to, and has no
current year business credit for, the taxable
year of such spouse which ends within or with
the taxpayer's taxable year.
(B) Controlled groups.--In the case of a
controlled group, the $25,000 amount specified
under subparagraph (B) of paragraph (1) shall
be reduced for each component member of such
group by apportioning $25,000 among the
component members of such group in such manner
as the Secretary shall by regulations
prescribe. For purposes of the preceding
sentence, the term ``controlled group'' has the
meaning given to such term by section 1563(a).
(C) Limitations with respect to certain
persons.--In the case of a person described in
subparagraph (A) or (B) of section 46(e)(1) (as
in effect on the day before the date of the
enactment of the Revenue Reconciliation Act of
1990), the $25,000 amount specified under
subparagraph (B) of paragraph (1) shall equal
such person's ratable share (as determined
under section 46(e)(2) (as so in effect) of
such amount.
(D) Estates and trusts.--In the case of an
estate or trust, the $25,000 amount specified
under subparagraph (B) of paragraph (1) shall
be reduced to an amount which bears the same
ratio to $25,000 as the portion of the income
of the estate or trust which is not allocated
to beneficiaries bears to the total income of
the estate or trust.
(E) Corporations.--In the case of a
corporation, this subsection shall be applied
by treating the corporation as having a
tentative minimum tax of zero.
(d) Ordering rules.--For purposes of any provision of this
title where it is necessary to ascertain the extent to which
the credits determined under any section referred to in
subsection (b) are used in a taxable year or as a carryback or
carryforward--
(1) In general.--The order in which such credits are
used shall be determined on the basis of the order in
which they are listed in subsection (b) as of the close
of the taxable year in which the credit is used.
(2) Components of investment credit.--The order in
which the credits listed in section 46 are used shall
be determined on the basis of the order in which such
credits are listed in section 46 as of the close of the
taxable year in which the credit is used.
* * * * * * *
SEC. 42. LOW-INCOME HOUSING CREDIT.
(a) In general.--For purposes of section 38, the amount of
the low-income housing credit determined under this section for
any taxable year in the credit period shall be an amount equal
to--
(1) the applicable percentage of
(2) the qualified basis of each qualified low-income
building.
(b) Applicable percentage: 70 percent present value credit
for certain new buildings; 30 percent present value credit for
certain other buildings.--
(1) Determination of applicable percentage.--For
purposes of this section--
(A) In general.--The term ``applicable
percentage'' means, with respect to any
building, the appropriate percentage prescribed
by the Secretary for the earlier of--
(i) the month in which such building
is placed in service, or
(ii) at the election of the
taxpayer--
(I) the month in which the
taxpayer and the housing credit
agency enter into an agreement
with respect to such building
(which is binding on such
agency, the taxpayer, and all
successors in interest) as to
the housing credit dollar
amount to be allocated to such
building, or
(II) in the case of any
building to which subsection
(h)(4)(B) applies, the month in
which the tax-exempt
obligations are issued.
A month may be elected under clause (ii) only
if the election is made not later than the 5th
day after the close of such month. Such an
election, once made, shall be irrevocable.
(B) Method of prescribing percentages.--The
percentages prescribed by the Secretary for any
month shall be percentages which will yield
over a 10-year period amounts of credit under
subsection (a) which have a present value equal
to--
(i) 70 percent of the qualified basis
of a new building which is not
federally subsidized for the taxable
year, and
(ii) 30 percent of the qualified
basis of a building not described in
clause (i).
(C) Method of discounting.--The present value
under subparagraph (B) shall be determined--
(i) as of the last day of the 1st
year of the 10-year period referred to
in subparagraph (B),
(ii) by using a discount rate equal
to 72 percent of the average of the
annual Federal mid-term rate and the
annual Federal long-term rate
applicable under section 1274(d)(1) to
the month applicable under clause (i)
or (ii) of subparagraph (A) and
compounded annually, and
(iii) by assuming that the credit
allowable under this section for any
year is received on the last day of
such year.
(2) Minimum credit rate for non-federally subsidized
new buildings.--In the case of any new building--
(A) which is placed in service by the
taxpayer after the date of the enactment of
this paragraph, and
(B) which is not federally subsidized for the
taxable year,
the applicable percentage shall not be less than 9
percent.
(3) Cross references.--
(A) For treatment of certain rehabilitation
expenditures as separate new buildings, see
subsection (e).
(B) For determination of applicable
percentage for increases in qualified basis
after the 1st year of the credit period, see
subsection (f)(3).
(C) For authority of housing credit agency to
limit applicable percentage and qualified basis
which may be taken into account under this
section with respect to any building, see
subsection (h)(7).
(c) Qualified basis; qualified low-income building.--For
purposes of this section--
(1) Qualified basis.--
(A) Determination.--The qualified basis of
any qualified low-income building for any
taxable year is an amount equal to--
(i) the applicable fraction
(determined as of the close of such
taxable year) of
(ii) the eligible basis of such
building (determined under subsection
(d)(5)).
(B) Applicable fraction.--For purposes of
subparagraph (A), the term ``applicable
fraction'' means the smaller of the unit
fraction or the floor space fraction.
(C) Unit fraction.--For purposes of
subparagraph (B), the term ``unit fraction''
means the fraction--
(i) the numerator of which is the
number of low-income units in the
building, and
(ii) the denominator of which is the
number of residential rental units
(whether or not occupied) in such
building.
(D) Floor space fraction.--For purposes of
subparagraph (B), the term ``floor space
fraction'' means the fraction--
(i) the numerator of which is the
total floor space of the low-income
units in such building, and
(ii) the denominator of which is the
total floor space of the residential
rental units (whether or not occupied)
in such building.
(E) Qualified basis to include portion of
building used to provide supportive services
for homeless.--In the case of a qualified low-
income building described in subsection
(i)(3)(B)(iii), the qualified basis of such
building for any taxable year shall be
increased by the lesser of--
(i) so much of the eligible basis of
such building as is used throughout the
year to provide supportive services
designed to assist tenants in locating
and retaining permanent housing, or
(ii) 20 percent of the qualified
basis of such building (determined
without regard to this subparagraph).
(2) Qualified low-income building.--The term
``qualified low-income building'' means any building--
(A) which is part of a qualified low-income
housing project at all times during the
period--
(i) beginning on the 1st day in the
compliance period on which such
building is part of such a project, and
(ii) ending on the last day of the
compliance period with respect to such
building, and
(B) to which the amendments made by section
201(a) of the Tax Reform Act of 1986 apply.
(d) Eligible basis.--For purposes of this section--
(1) New buildings.--The eligible basis of a new
building is its adjusted basis as of the close of the
1st taxable year of the credit period.
(2) Existing buildings.--
(A) In general.--The eligible basis of an
existing building is--
(i) in the case of a building which
meets the requirements of subparagraph
(B), its adjusted basis as of the close
of the 1st taxable year of the credit
period, and
(ii) zero in any other case.
(B) Requirements.--A building meets the
requirements of this subparagraph if--
(i) the building is acquired by
purchase (as defined in section
179(d)(2)),
(ii) there is a period of at least 10
years between the date of its
acquisition by the taxpayer and the
date the building was last placed in
service,
(iii) the building was not previously
placed in service by the taxpayer or by
any person who was a related person
with respect to the taxpayer as of the
time previously placed in service, and
(iv) except as provided in subsection
(f)(5), a credit is allowable under
subsection (a) by reason of subsection
(e) with respect to the building.
(C) Adjusted basis.--For purposes of
subparagraph (A), the adjusted basis of any
building shall not include so much of the basis
of such building as is determined by reference
to the basis of other property held at any time
by the person acquiring the building.
(D) Special rules for subparagraph (B).--
(i) Special rules for certain
transfers.--For purposes of determining
under subparagraph (B)(ii) when a
building was last placed in service,
there shall not be taken into account
any placement in service--
(I) in connection with the
acquisition of the building in
a transaction in which the
basis of the building in the
hands of the person acquiring
it is determined in whole or in
part by reference to the
adjusted basis of such building
in the hands of the person from
whom acquired,
(II) by a person whose basis
in such building is determined
under section 1014(a) (relating
to property acquired from a
decedent),
(III) by any governmental
unit or qualified nonprofit
organization (as defined in
subsection (h)(5)) if the
requirements of subparagraph
(B)(ii) are met with respect to
the placement in service by
such unit or organization and
all the income from such
property is exempt from Federal
income taxation,
(IV) by any person who
acquired such building by
foreclosure (or by instrument
in lieu of foreclosure) of any
purchase-money security
interest held by such person if
the requirements of
subparagraph (B)(ii) are met
with respect to the placement
in service by such person and
such building is resold within
12 months after the date such
building is placed in service
by such person after such
foreclosure, or
(V) of a single-family
residence by any individual who
owned and used such residence
for no other purpose than as
his principal residence.
(ii) Related person.--For purposes of
subparagraph (B)(iii), a person
(hereinafter in this subclause referred
to as the ``related person'') is
related to any person if the related
person bears a relationship to such
person specified in section 267(b) or
707(b)(1), or the related person and
such person are engaged in trades or
businesses under common control (within
the meaning of subsections (a) and (b)
of section 52).
(3) Eligible basis reduced where disproportionate
standards for units.--
(A) In general.--Except as provided in
subparagraph (B), the eligible basis of any
building shall be reduced by an amount equal to
the portion of the adjusted basis of the
building which is attributable to residential
rental units in the building which are not low-
income units and which are above the average
quality standard of the low-income units in the
building.
(B) Exception where taxpayer elects to
exclude excess costs.--
(i) In general.--Subparagraph (A)
shall not apply with respect to a
residential rental unit in a building
which is not a low-income unit if--
(I) the excess described in
clause (ii) with respect to
such unit is not greater than
15 percent of the cost
described in clause (ii)(II),
and
(II) the taxpayer elects to
exclude from the eligible basis
of such building the excess
described in clause (ii) with
respect to such unit.
(ii) Excess.--The excess described in
this clause with respect to any unit is
the excess of--
(I) the cost of such unit,
over
(II) the amount which would
be the cost of such unit if the
average cost per square foot of
low-income units in the
building were substituted for
the cost per square foot of
such unit.
The Secretary may by regulation provide for
the determination of the excess under this
clause on a basis other than square foot costs.
(4) Special rules relating to determination of
adjusted basis.--For purposes of this subsection--
(A) In general.--Except as provided in
subparagraphs (B) and (C), the adjusted basis
of any building shall be determined without
regard to the adjusted basis of any property
which is not residential rental property.
(B) Basis of property in common areas, etc.,
included.--The adjusted basis of any building
shall be determined by taking into account the
adjusted basis of property (of a character
subject to the allowance for depreciation) used
in common areas or provided as comparable
amenities to all residential rental units in
such building.
(C) Inclusion of basis of property used to
provide services for certain nontenants.--
(i) In general.--The adjusted basis
of any building located in a qualified
census tract (as defined in paragraph
(5)(B)(ii)) shall be determined by
taking into account the adjusted basis
of property (of a character subject to
the allowance for depreciation and not
otherwise taken into account) used
throughout the taxable year in
providing any community service
facility.
(ii) Limitation.--The increase in the
adjusted basis of any building which is
taken into account by reason of clause
(i) shall not exceed the sum of--
(I) 25 percent of so much of
the eligible basis of the
qualified low-income housing
project of which it is a part
as does not exceed $15,000,000,
plus
(II) 10 percent of so much of
the eligible basis of such
project as is not taken into
account under subclause (I).
For purposes of the preceding sentence, all
community service facilities which are part of
the same qualified low-income housing project
shall be treated as one facility.
(iii) Community service facility.--
For purposes of this subparagraph, the
term ``community service facility''
means any facility designed to serve
primarily individuals whose income is
60 percent or less of area median
income (within the meaning of
subsection (g)(1)(B)).
(D) No reduction for depreciation.--The
adjusted basis of any building shall be
determined without regard to paragraphs (2) and
(3) of section 1016(a).
(5) Special rules for determining eligible basis.--
(A) Federal grants not taken into account in
determining eligible basis.--The eligible basis
of a building shall not include any costs
financed with the proceeds of a federally
funded grant.
(B) Increase in credit for buildings in high
cost areas.--
(i) In general.--In the case of any
building located in a qualified census
tract or difficult development area
which is designated for purposes of
this subparagraph--
(I) in the case of a new
building, the eligible basis of
such building shall be 130
percent of such basis
determined without regard to
this subparagraph, and
(II) in the case of an
existing building, the
rehabilitation expenditures
taken into account under
subsection (e) shall be 130
percent of such expenditures
determined without regard to
this subparagraph.
(ii) Qualified census tract.--
(I) In general.--The term
``qualified census tract''
means any census tract which is
designated by the Secretary of
Housing and Urban Development
and, for the most recent year
for which census data are
available on household income
in such tract, either in which
50 percent or more of the
households have an income which
is less than 60 percent of the
area median gross income for
such year or which has a
poverty rate of at least 25
percent. If the Secretary of
Housing and Urban Development
determines that sufficient data
for any period are not
available to apply this clause
on the basis of census tracts,
such Secretary shall apply this
clause for such period on the
basis of enumeration districts.
(II) Limit on MSA's
designated.--The portion of a
metropolitan statistical area
which may be designated for
purposes of this subparagraph
shall not exceed an area having
20 percent of the population of
such metropolitan statistical
area.
(III) Determination of
areas.--For purposes of this
clause, each metropolitan
statistical area shall be
treated as a separate area and
all nonmetropolitan areas in a
State shall be treated as 1
area.
(iii) Difficult development areas.--
(I) In general.--The term
``difficult development areas''
means any area designated by
the Secretary of Housing and
Urban Development as an area
which has high construction,
land, and utility costs
relative to area median gross
income.
(II) Limit on areas
designated.--The portions of
metropolitan statistical areas
which may be designated for
purposes of this subparagraph
shall not exceed an aggregate
area having 20 percent of the
population of such metropolitan
statistical areas. A comparable
rule shall apply to
nonmetropolitan areas.
(iv) Special rules and definitions.--
For purposes of this subparagraph--
(I) population shall be
determined on the basis of the
most recent decennial census
for which data are available,
(II) area median gross income
shall be determined in
accordance with subsection
(g)(4),
(III) the term ``metropolitan
statistical area'' has the same
meaning as when used in section
143(k)(2)(B), and
(IV) the term
``nonmetropolitan area'' means
any county (or portion thereof)
which is not within a
metropolitan statistical area.
(v) Buildings designated by State
housing credit agency.--Any building
which is designated by the State
housing credit agency as requiring the
increase in credit under this
subparagraph in order for such building
to be financially feasible as part of a
qualified low-income housing project
shall be treated for purposes of this
subparagraph as located in a difficult
development area which is designated
for purposes of this subparagraph. The
preceding sentence shall not apply to
any building if paragraph (1) of
subsection (h) does not apply to any
portion of the eligible basis of such
building by reason of paragraph (4) of
such subsection.
(6) Credit allowable for certain buildings acquired
during 10-year period described in paragraph
(2)(B)(ii).--
(A) In general.--Paragraph (2)(B)(ii) shall
not apply to any federally- or State-assisted
building.
(B) Buildings acquired from insured
depository institutions in default.--On
application by the taxpayer, the Secretary may
waive paragraph (2)(B)(ii) with respect to any
building acquired from an insured depository
institution in default (as defined in section 3
of the Federal Deposit Insurance Act) or from a
receiver or conservator of such an institution.
(C) Federally- or State-assisted building.--
For purposes of this paragraph--
(i) Federally-assisted building.--The
term ``federally-assisted building''
means any building which is
substantially assisted, financed, or
operated under section 8 of the United
States Housing Act of 1937, section
221(d)(3), 221(d)(4), or 236 of the
National Housing Act, section 515 of
the Housing Act of 1949, or any other
housing program administered by the
Department of Housing and Urban
Development or by the Rural Housing
Service of the Department of
Agriculture.
(ii) State-assisted building.--The
term ``State-assisted building'' means
any building which is substantially
assisted, financed, or operated under
any State law similar in purposes to
any of the laws referred to in clause
(i).
(7) Acquisition of building before end of prior
compliance period.--
(A) In general.--Under regulations prescribed
by the Secretary, in the case of a building
described in subparagraph (B) (or interest
therein) which is acquired by the taxpayer--
(i) paragraph (2)(B) shall not apply,
but
(ii) the credit allowable by reason
of subsection (a) to the taxpayer for
any period after such acquisition shall
be equal to the amount of credit which
would have been allowable under
subsection (a) for such period to the
prior owner referred to in subparagraph
(B) had such owner not disposed of the
building.
(B) Description of building.--A building is
described in this subparagraph if--
(i) a credit was allowed by reason of
subsection (a) to any prior owner of
such building, and
(ii) the taxpayer acquired such
building before the end of the
compliance period for such building
with respect to such prior owner
(determined without regard to any
disposition by such prior owner).
(e) Rehabilitation expenditures treated as separate new
building.--
(1) In general.--Rehabilitation expenditures paid or
incurred by the taxpayer with respect to any building
shall be treated for purposes of this section as a
separate new building.
(2) Rehabilitation expenditures.--For purposes of
paragraph (1)--
(A) In general.--The term ``rehabilitation
expenditures'' means amounts chargeable to
capital account and incurred for property (or
additions or improvements to property) of a
character subject to the allowance for
depreciation in connection with the
rehabilitation of a building.
(B) Cost of acquisition, etc., not
included.--Such term does not include the cost
of acquiring any building (or interest therein)
or any amount not permitted to be taken into
account under paragraph (3) or (4) of
subsection (d).
(3) Minimum expenditures to qualify.--
(A) In general.--Paragraph (1) shall apply to
rehabilitation expenditures with respect to any
building only if--
(i) the expenditures are allocable to
1 or more low-income units or
substantially benefit such units, and
(ii) the amount of such expenditures
during any 24-month period meets the
requirements of whichever of the
following subclauses requires the
greater amount of such expenditures:
(I) The requirement of this
subclause is met if such amount
is not less than 20 percent of
the adjusted basis of the
building (determined as of the
1st day of such period and
without regard to paragraphs
(2) and (3) of section
1016(a)).
(II) The requirement of this
subclause is met if the
qualified basis attributable to
such amount, when divided by
the number of low-income units
in the building, is $6,000 or
more.
(B) Exception from 10 percent
rehabilitation.--In the case of a building
acquired by the taxpayer from a governmental
unit, at the election of the taxpayer,
subparagraph (A)(ii)(I) shall not apply and the
credit under this section for such
rehabilitation expenditures shall be determined
using the percentage applicable under
subsection (b)(2)(B)(ii).
(C) Date of determination.--The determination
under subparagraph (A) shall be made as of the
close of the 1st taxable year in the credit
period with respect to such expenditures.
(D) Inflation adjustment.--In the case of any
expenditures which are treated under paragraph
(4) as placed in service during any calendar
year after 2009, the $6,000 amount in
subparagraph (A)(ii)(II) shall be increased by
an amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
such calendar year by substituting
``calendar year 2008'' for ``calendar
year 2016'' in subparagraph (A)(ii)
thereof.
Any increase under the preceding sentence which
is not a multiple of $100 shall be rounded to
the nearest multiple of $100.
(4) Special rules.--For purposes of applying this
section with respect to expenditures which are treated
as a separate building by reason of this subsection--
(A) such expenditures shall be treated as
placed in service at the close of the 24-month
period referred to in paragraph (3)(A), and
(B) the applicable fraction under subsection
(c)(1) shall be the applicable fraction for the
building (without regard to paragraph (1)) with
respect to which the expenditures were
incurred.
Nothing in subsection (d)(2) shall prevent a credit
from being allowed by reason of this subsection.
(5) No double counting.--Rehabilitation expenditures
may, at the election of the taxpayer, be taken into
account under this subsection or subsection
(d)(2)(A)(i) but not under both such subsections.
(6) Regulations to apply subsection with respect to
group of units in building.--The Secretary may
prescribe regulations, consistent with the purposes of
this subsection, treating a group of units with respect
to which rehabilitation expenditures are incurred as a
separate new building.
(f) Definition and special rules relating to credit period.--
(1) Credit period defined.--For purposes of this
section, the term ``credit period'' means, with respect
to any building, the period of 10 taxable years
beginning with--
(A) the taxable year in which the building is
placed in service, or
(B) at the election of the taxpayer, the
succeeding taxable year,
but only if the building is a qualified low-income
building as of the close of the 1st year of such
period. The election under subparagraph (B), once made,
shall be irrevocable.
(2) Special rule for 1st year of credit period.--
(A) In general.--The credit allowable under
subsection (a) with respect to any building for
the 1st taxable year of the credit period shall
be determined by substituting for the
applicable fraction under subsection (c)(1) the
fraction--
(i) the numerator of which is the sum
of the applicable fractions determined
under subsection (c)(1) as of the close
of each full month of such year during
which such building was in service, and
(ii) the denominator of which is 12.
(B) Disallowed 1st year credit allowed in
11th year.--Any reduction by reason of
subparagraph (A) in the credit allowable
(without regard to subparagraph (A)) for the
1st taxable year of the credit period shall be
allowable under subsection (a) for the 1st
taxable year following the credit period.
(3) Determination of applicable percentage with
respect to increases in qualified basis after 1st year
of credit period.--
(A) In general.--In the case of any building
which was a qualified low-income building as of
the close of the 1st year of the credit period,
if--
(i) as of the close of any taxable
year in the compliance period (after
the 1st year of the credit period) the
qualified basis of such building
exceeds
(ii) the qualified basis of such
building as of the close of the 1st
year of the credit period,
the applicable percentage which shall apply
under subsection (a) for the taxable year to
such excess shall be the percentage equal to 2/
3 of the applicable percentage which (after the
application of subsection (h)) would but for
this paragraph apply to such basis.
(B) 1st year computation applies.--A rule
similar to the rule of paragraph (2)(A) shall
apply to any increase in qualified basis to
which subparagraph (A) applies for the 1st year
of such increase.
(4) Dispositions of property.--If a building (or an
interest therein) is disposed of during any year for
which credit is allowable under subsection (a), such
credit shall be allocated between the parties on the
basis of the number of days during such year the
building (or interest) was held by each. In any such
case, proper adjustments shall be made in the
application of subsection (j).
(5) Credit period for existing buildings not to begin
before rehabilitation credit allowed.--
(A) In general.--The credit period for an
existing building shall not begin before the
1st taxable year of the credit period for
rehabilitation expenditures with respect to the
building.
(B) Acquisition credit allowed for certain
buildings not allowed a rehabilitation
credit.--
(i) In general.--In the case of a
building described in clause (ii)--
(I) subsection (d)(2)(B)(iv)
shall not apply, and
(II) the credit period for
such building shall not begin
before the taxable year which
would be the 1st taxable year
of the credit period for
rehabilitation expenditures
with respect to the building
under the modifications
described in clause (ii)(II).
(ii) Building described.--A building
is described in this clause if--
(I) a waiver is granted under
subsection (d)(6)(B) with
respect to the acquisition of
the building, and
(II) a credit would be
allowed for rehabilitation
expenditures with respect to
such building if subsection
(e)(3)(A)(ii)(I) did not apply
and if the dollar amount in
effect under subsection
(e)(3)(A)(ii)(II) were two-
thirds of such amount.
(g) Qualified low-income housing project.--For purposes of
this section--
(1) In general.--The term ``qualified low-income
housing project'' means any project for residential
rental property if the project meets the requirements
of subparagraph (A), (B), or (C) whichever is elected
by the taxpayer:
(A) 20-50 test.--The project meets the
requirements of this subparagraph if 20 percent
or more of the residential units in such
project are both rent-restricted and occupied
by individuals whose income is 50 percent or
less of area median gross income.
(B) 40-60 test.--The project meets the
requirements of this subparagraph if 40 percent
or more of the residential units in such
project are both rent-restricted and occupied
by individuals whose income is 60 percent or
less of area median gross income.
(C) Average income test.--
(i) In general.--The project meets
the minimum requirements of this
subparagraph if 40 percent or more (25
percent or more in the case of a
project described in section 142(d)(6))
of the residential units in such
project are both rent-restricted and
occupied by individuals whose income
does not exceed the imputed income
limitation designated by the taxpayer
with respect to the respective unit.
(ii) Special rules relating to income
limitation.--For purposes of clause
(i)--
(I) Designation.--The
taxpayer shall designate the
imputed income limitation of
each unit taken into account
under such clause.
(II) Average test.--The
average of the imputed income
limitations designated under
subclause (I) shall not exceed
60 percent of area median gross
income.
(III) 10-percent
increments.--The designated
imputed income limitation of
any unit under subclause (I)
shall be 20 percent, 30
percent, 40 percent, 50
percent, 60 percent, 70
percent, or 80 percent of area
median gross income.
Any election under this paragraph, once made, shall be
irrevocable. For purposes of this paragraph, any
property shall not be treated as failing to be
residential rental property merely because part of the
building in which such property is located is used for
purposes other than residential rental purposes.
(2) Rent-restricted units.--
(A) In general.--For purposes of paragraph
(1), a residential unit is rent-restricted if
the gross rent with respect to such unit does
not exceed 30 percent of the imputed income
limitation applicable to such unit. For
purposes of the preceding sentence, the amount
of the income limitation under paragraph (1)
applicable for any period shall not be less
than such limitation applicable for the
earliest period the building (which contains
the unit) was included in the determination of
whether the project is a qualified low-income
housing project.
(B) Gross rent.--For purposes of subparagraph
(A), gross rent--
(i) does not include any payment
under section 8 of the United States
Housing Act of 1937 or any comparable
rental assistance program (with respect
to such unit or occupants thereof),
(ii) includes any utility allowance
determined by the Secretary after
taking into account such determinations
under section 8 of the United States
Housing Act of 1937,
(iii) does not include any fee for a
supportive service which is paid to the
owner of the unit (on the basis of the
low-income status of the tenant of the
unit) by any governmental program of
assistance (or by an organization
described in section 501(c)(3) and
exempt from tax under section 501(a))
if such program (or organization)
provides assistance for rent and the
amount of assistance provided for rent
is not separable from the amount of
assistance provided for supportive
services, and
(iv) does not include any rental
payment to the owner of the unit to the
extent such owner pays an equivalent
amount to the Farmers' Home
Administration under section 515 of the
Housing Act of 1949.
For purposes of clause (iii), the term
``supportive service'' means any service
provided under a planned program of services
designed to enable residents of a residential
rental property to remain independent and avoid
placement in a hospital, nursing home, or
intermediate care facility for the mentally or
physically handicapped. In the case of a
single-room occupancy unit or a building
described in subsection (i)(3)(B)(iii), such
term includes any service provided to assist
tenants in locating and retaining permanent
housing.
(C) Imputed income limitation applicable to
unit.--For purposes of this paragraph, the
imputed income limitation applicable to a unit
is the income limitation which would apply
under paragraph (1) to individuals occupying
the unit if the number of individuals occupying
the unit were as follows:
(i) In the case of a unit which does
not have a separate bedroom, 1
individual.
(ii) In the case of a unit which has
1 or more separate bedrooms, 1.5
individuals for each separate bedroom.
In the case of a project with respect to which
a credit is allowable by reason of this section
and for which financing is provided by a bond
described in section 142(a)(7), the imputed
income limitation shall apply in lieu of the
otherwise applicable income limitation for
purposes of applying section 142(d)(4)(B)(ii).
(D) Treatment of units occupied by
individuals whose incomes rise above limit.--
(i) In general.--Except as provided
in clauses (ii), (iii), and (iv),
notwithstanding an increase in the
income of the occupants of a low-income
unit above the income limitation
applicable under paragraph (1), such
unit shall continue to be treated as a
low-income unit if the income of such
occupants initially met such income
limitation and such unit continues to
be rent-restricted.
(ii) Rental of next available unit in
case of 20-50 or 40-60 test.--In the
case of a project with respect to which
the taxpayer elects the requirements of
subparagraph (A) or (B) of paragraph
(1), if the income of the occupants of
the unit increases above 140 percent of
the income limitation applicable under
paragraph (1), clause (i) shall cease
to apply to such unit if any
residential rental unit in the building
(of a size comparable to, or smaller
than, such unit) is occupied by a new
resident whose income exceeds such
income limitation.
(iii) Rental of next available unit
in case of average income test.--In the
case of a project with respect to which
the taxpayer elects the requirements of
subparagraph (C) of paragraph (1), if
the income of the occupants of the unit
increases above 140 percent of the
greater of--
(I) 60 percent of area median
gross income, or
(II) the imputed income
limitation designated with
respect to the unit under
paragraph (1)(C)(ii)(I),
clause (i) shall cease to apply to any such
unit if any residential rental unit in the
building (of a size comparable to, or smaller
than, such unit) is occupied by a new resident
whose income exceeds the limitation described
in clause (v).
(iv) Deep rent skewed projects.--In
the case of a project described in
section 142(d)(4)(B), clause (ii) or
(iii), whichever is applicable, shall
be applied by substituting ``170
percent'' for ``140 percent'', and--
(I) in the case of clause
(ii), by substituting ``any
low-income unit in the building
is occupied by a new resident
whose income exceeds 40 percent
of area median gross income''
for ``any residential rental
unit'' and all that follows in
such clause, and
(II) in the case of clause
(iii), by substituting ``any
low-income unit in the building
is occupied by a new resident
whose income exceeds the lesser
of 40 percent of area median
gross income or the imputed
income limitation designated
with respect to such unit under
paragraph (1)(C)(ii)(I)'' for
``any residential rental unit''
and all that follows in such
clause.
(v) Limitation described.--For
purposes of clause (iii), the
limitation described in this clause
with respect to any unit is--
(I) the imputed income
limitation designated with
respect to such unit under
paragraph (1)(C)(ii)(I), in the
case of a unit which was taken
into account as a low-income
unit prior to becoming vacant,
and
(II) the imputed income
limitation which would have to
be designated with respect to
such unit under such paragraph
in order for the project to
continue to meet the
requirements of paragraph
(1)(C)(ii)(II), in the case of
any other unit.
(E) Units where Federal rental assistance is
reduced as tenant's income increases.--If the
gross rent with respect to a residential unit
exceeds the limitation under subparagraph (A)
by reason of the fact that the income of the
occupants thereof exceeds the income limitation
applicable under paragraph (1), such unit
shall, nevertheless, be treated as a rent-
restricted unit for purposes of paragraph (1)
if--
(i) a Federal rental assistance
payment described in subparagraph
(B)(i) is made with respect to such
unit or its occupants, and
(ii) the sum of such payment and the
gross rent with respect to such unit
does not exceed the sum of the amount
of such payment which would be made and
the gross rent which would be payable
with respect to such unit if--
(I) the income of the
occupants thereof did not
exceed the income limitation
applicable under paragraph (1),
and
(II) such units were rent-
restricted within the meaning
of subparagraph (A).
The preceding sentence shall apply to any unit
only if the result described in clause (ii) is
required by Federal statute as of the date of
the enactment of this subparagraph and as of
the date the Federal rental assistance payment
is made.
(3) Date for meeting requirements.--
(A) In general.--Except as otherwise provided
in this paragraph, a building shall be treated
as a qualified low-income building only if the
project (of which such building is a part)
meets the requirements of paragraph (1) not
later than the close of the 1st year of the
credit period for such building.
(B) Buildings which rely on later buildings
for qualification.--
(i) In general.--In determining
whether a building (hereinafter in this
subparagraph referred to as the ``prior
building'') is a qualified low-income
building, the taxpayer may take into
account 1 or more additional buildings
placed in service during the 12-month
period described in subparagraph (A)
with respect to the prior building only
if the taxpayer elects to apply clause
(ii) with respect to each additional
building taken into account.
(ii) Treatment of elected
buildings.--In the case of a building
which the taxpayer elects to take into
account under clause (i), the period
under subparagraph (A) for such
building shall end at the close of the
12-month period applicable to the prior
building.
(iii) Date prior building is treated
as placed in service.--For purposes of
determining the credit period and the
compliance period for the prior
building, the prior building shall be
treated for purposes of this section as
placed in service on the most recent
date any additional building elected by
the taxpayer (with respect to such
prior building) was placed in service.
(C) Special rule.--A building--
(i) other than the 1st building
placed in service as part of a project,
and
(ii) other than a building which is
placed in service during the 12-month
period described in subparagraph (A)
with respect to a prior building which
becomes a qualified low-income
building,
shall in no event be treated as a qualified
low-income building unless the project is a
qualified low-income housing project (without
regard to such building) on the date such
building is placed in service.
(D) Projects with more than 1 building must
be identified.--For purposes of this section, a
project shall be treated as consisting of only
1 building unless, before the close of the 1st
calendar year in the project period (as defined
in subsection (h)(1)(F)(ii)), each building
which is (or will be) part of such project is
identified in such form and manner as the
Secretary may provide.
(4) Certain rules made applicable.--Paragraphs (2)
(other than subparagraph (A) thereof), (3), (4), (5),
(6), and (7) of section 142(d), and section 6652(j),
shall apply for purposes of determining whether any
project is a qualified low-income housing project and
whether any unit is a low-income unit; except that, in
applying such provisions for such purposes, the term
``gross rent'' shall have the meaning given such term
by paragraph (2)(B) of this subsection.
(5) Election to treat building after compliance
period as not part of a project.--For purposes of this
section, the taxpayer may elect to treat any building
as not part of a qualified low-income housing project
for any period beginning after the compliance period
for such building.
(6) Special rule where de minimis equity
contribution.--Property shall not be treated as failing
to be residential rental property for purposes of this
section merely because the occupant of a residential
unit in the project pays (on a voluntary basis) to the
lessor a de minimis amount to be held toward the
purchase by such occupant of a residential unit in such
project if--
(A) all amounts so paid are refunded to the
occupant on the cessation of his occupancy of a
unit in the project, and
(B) the purchase of the unit is not permitted
until after the close of the compliance period
with respect to the building in which the unit
is located.
Any amount paid to the lessor as described in the
preceding sentence shall be included in gross rent
under paragraph (2) for purposes of determining whether
the unit is rent-restricted.
(7) Scattered site projects.--Buildings which would
(but for their lack of proximity) be treated as a
project for purposes of this section shall be so
treated if all of the dwelling units in each of the
buildings are rent-restricted (within the meaning of
paragraph (2)) residential rental units.
(8) Waiver of certain de minimis errors and
recertifications.--On application by the taxpayer, the
Secretary may waive--
(A) any recapture under subsection (j) in the
case of any de minimis error in complying with
paragraph (1), or
(B) any annual recertification of tenant
income for purposes of this subsection, if the
entire building is occupied by low-income
tenants.
(9) Clarification of general public use
requirement.--A project does not fail to meet the
general public use requirement solely because of
occupancy restrictions or preferences that favor
tenants--
(A) with special needs,
(B) who are members of a specified group
under a Federal program or State program or
policy that supports housing for such a
specified group, or
(C) who are involved in artistic or literary
activities.
(h) Limitation on aggregate credit allowable with respect to
projects located in a State.--
(1) Credit may not exceed credit amount allocated to
building.--
(A) In general.--The amount of the credit
determined under this section for any taxable
year with respect to any building shall not
exceed the housing credit dollar amount
allocated to such building under this
subsection.
(B) Time for making allocation.--Except in
the case of an allocation which meets the
requirements of subparagraph (C), (D), (E), or
(F), an allocation shall be taken into account
under subparagraph (A) only if it is made not
later than the close of the calendar year in
which the building is placed in service.
(C) Exception where binding commitment.--An
allocation meets the requirements of this
subparagraph if there is a binding commitment
(not later than the close of the calendar year
in which the building is placed in service) by
the housing credit agency to allocate a
specified housing credit dollar amount to such
building beginning in a specified later taxable
year.
(D) Exception where increase in qualified
basis.--
(i) In general.--An allocation meets
the requirements of this subparagraph
if such allocation is made not later
than the close of the calendar year in
which ends the taxable year to which it
will 1st apply but only to the extent
the amount of such allocation does not
exceed the limitation under clause
(ii).
(ii) Limitation.--The limitation
under this clause is the amount of
credit allowable under this section
(without regard to this subsection) for
a taxable year with respect to an
increase in the qualified basis of the
building equal to the excess of--
(I) the qualified basis of
such building as of the close
of the 1st taxable year to
which such allocation will
apply, over
(II) the qualified basis of
such building as of the close
of the 1st taxable year to
which the most recent prior
housing credit allocation with
respect to such building
applied.
(iii) Housing credit dollar amount
reduced by full allocation.--
Notwithstanding clause (i), the full
amount of the allocation shall be taken
into account under paragraph (2).
(E) Exception where 10 percent of cost
incurred.--
(i) In general.--An allocation meets
the requirements of this subparagraph
if such allocation is made with respect
to a qualified building which is placed
in service not later than the close of
the second calendar year following the
calendar year in which the allocation
is made.
(ii) Qualified building.--For
purposes of clause (i), the term
``qualified building'' means any
building which is part of a project if
the taxpayer's basis in such project
(as of the date which is 1 year after
the date that the allocation was made)
is more than 10 percent of the
taxpayer's reasonably expected basis in
such project (as of the close of the
second calendar year referred to in
clause (i)). Such term does not include
any existing building unless a credit
is allowable under subsection (e) for
rehabilitation expenditures paid or
incurred by the taxpayer with respect
to such building for a taxable year
ending during the second calendar year
referred to in clause (i) or the prior
taxable year.
(F) Allocation of credit on a project
basis.--
(i) In general.--In the case of a
project which includes (or will
include) more than 1 building, an
allocation meets the requirements of
this subparagraph if--
(I) the allocation is made to
the project for a calendar year
during the project period,
(II) the allocation only
applies to buildings placed in
service during or after the
calendar year for which the
allocation is made, and
(III) the portion of such
allocation which is allocated
to any building in such project
is specified not later than the
close of the calendar year in
which the building is placed in
service.
(ii) Project period.--For purposes of
clause (i), the term ``project period''
means the period--
(I) beginning with the 1st
calendar year for which an
allocation may be made for the
1st building placed in service
as part of such project, and
(II) ending with the calendar
year the last building is
placed in service as part of
such project.
(2) Allocated credit amount to apply to all taxable
years ending during or after credit allocation year.--
Any housing credit dollar amount allocated to any
building for any calendar year--
(A) shall apply to such building for all
taxable years in the compliance period ending
during or after such calendar year, and
(B) shall reduce the aggregate housing credit
dollar amount of the allocating agency only for
such calendar year.
(3) Housing credit dollar amount for agencies.--
(A) In general.--The aggregate housing credit
dollar amount which a housing credit agency may
allocate for any calendar year is the portion
of the State housing credit ceiling allocated
under this paragraph for such calendar year to
such agency.
(B) State ceiling initially allocated to
State housing credit agencies.--Except as
provided in subparagraphs (D) and (E), the
State housing credit ceiling for each calendar
year shall be allocated to the housing credit
agency of such State. If there is more than 1
housing credit agency of a State, all such
agencies shall be treated as a single agency.
(C) State housing credit ceiling.--The State
housing credit ceiling applicable to any State
for any calendar year shall be an amount equal
to the sum of--
(i) the unused State housing credit
ceiling (if any) of such State for the
preceding calendar year,
(ii) the greater of--
(I) $1.75 multiplied by the
State population, or
(II) $2,000,000,
(iii) the amount of State housing
credit ceiling returned in the calendar
year, plus
(iv) the amount (if any) allocated
under subparagraph (D) to such State by
the Secretary.
For purposes of clause (i), the unused State
housing credit ceiling for any calendar year is
the excess (if any) of the sum of the amounts
described in clauses (ii) through (iv) over the
aggregate housing credit dollar amount
allocated for such year. For purposes of clause
(iii), the amount of State housing credit
ceiling returned in the calendar year equals
the housing credit dollar amount previously
allocated within the State to any project which
fails to meet the 10 percent test under
paragraph (1)(E)(ii) on a date after the close
of the calendar year in which the allocation
was made or which does not become a qualified
low-income housing project within the period
required by this section or the terms of the
allocation or to any project with respect to
which an allocation is cancelled by mutual
consent of the housing credit agency and the
allocation recipient.
(D) Unused housing credit carryovers
allocated among certain States.--
(i) In general.--The unused housing
credit carryover of a State for any
calendar year shall be assigned to the
Secretary for allocation among
qualified States for the succeeding
calendar year.
(ii) Unused housing credit
carryover.--For purposes of this
subparagraph, the unused housing credit
carryover of a State for any calendar
year is the excess (if any) of--
(I) the unused State housing
credit ceiling for the year
preceding such year, over
(II) the aggregate housing
credit dollar amount allocated
for such year.
(iii) Formula for allocation of
unused housing credit carryovers among
qualified States.--The amount allocated
under this subparagraph to a qualified
State for any calendar year shall be
the amount determined by the Secretary
to bear the same ratio to the aggregate
unused housing credit carryovers of all
States for the preceding calendar year
as such State's population for the
calendar year bears to the population
of all qualified States for the
calendar year. For purposes of the
preceding sentence, population shall be
determined in accordance with section
146(j).
(iv) Qualified State.--For purposes
of this subparagraph, the term
``qualified State'' means, with respect
to a calendar year, any State--
(I) which allocated its
entire State housing credit
ceiling for the preceding
calendar year, and
(II) for which a request is
made (not later than May 1 of
the calendar year) to receive
an allocation under clause
(iii).
(E) Special rule for States with
constitutional home rule cities.--For purposes
of this subsection--
(i) In general.--The aggregate
housing credit dollar amount for any
constitutional home rule city for any
calendar year shall be an amount which
bears the same ratio to the State
housing credit ceiling for such
calendar year as--
(I) the population of such
city, bears to
(II) the population of the
entire State.
(ii) Coordination with other
allocations.--In the case of any State
which contains 1 or more constitutional
home rule cities, for purposes of
applying this paragraph with respect to
housing credit agencies in such State
other than constitutional home rule
cities, the State housing credit
ceiling for any calendar year shall be
reduced by the aggregate housing credit
dollar amounts determined for such year
for all constitutional home rule cities
in such State.
(iii) Constitutional home rule
city.--For purposes of this paragraph,
the term ``constitutional home rule
city'' has the meaning given such term
by section 146(d)(3)(C).
(F) State may provide for different
allocation.--Rules similar to the rules of
section 146(e) (other than paragraph (2)(B)
thereof) shall apply for purposes of this
paragraph.
(G) Population.--For purposes of this
paragraph, population shall be determined in
accordance with section 146(j).
(H) Cost-of-living adjustment.--
(i) In general.--In the case of a
calendar year after 2002, the
$2,000,000 and $1.75 amounts in
subparagraph (C) shall each be
increased by an amount equal to--
(I) such dollar amount,
multiplied by
(II) the cost-of-living
adjustment determined under
section 1(f)(3) for such
calendar year by substituting
``calendar year 2001'' for
``calendar year 2016'' in
subparagraph (A)(ii) thereof.
(ii) Rounding.--(I) In the case of
the $2,000,000 amount, any increase
under clause (i) which is not a
multiple of $5,000 shall be rounded to
the next lowest multiple of $5,000.
(II) In the case of the $1.75 amount,
any increase under clause (i) which is
not a multiple of 5 cents shall be
rounded to the next lowest multiple of
5 cents.
(I) Increase in State housing credit ceiling
for 2018, 2019, 2020, and 2021.--In the case of
calendar years 2018, 2019, 2020, and 2021, each
of the dollar amounts in effect under clauses
(I) and (II) of subparagraph (C)(ii) for any
calendar year (after any increase under
subparagraph (H)) shall be increased by
multiplying such dollar amount by 1.125.
(4) Credit for buildings financed by tax-exempt bonds
subject to volume cap not taken into account.--
(A) In general.--Paragraph (1) shall not
apply to the portion of any credit allowable
under subsection (a) which is attributable to
eligible basis financed by any obligation the
interest on which is exempt from tax under
section 103 if--
(i) such obligation is taken into
account under section 146, and
(ii) principal payments on such
financing are applied within a
reasonable period to redeem obligations
the proceeds of which were used to
provide such financing or such
financing is refunded as described in
section 146(i)(6).
(B) Special rule where 50 percent or more of
building is financed with tax-exempt bonds
subject to volume cap.--For purposes of
subparagraph (A), if 50 percent or more of the
aggregate basis of any building and the land on
which the building is located is financed by
any obligation described in subparagraph (A),
paragraph (1) shall not apply to any portion of
the credit allowable under subsection (a) with
respect to such building.
(5) Portion of State ceiling set-aside for certain
projects involving qualified nonprofit organizations.--
(A) In general.--Not more than 90 percent of
the State housing credit ceiling for any State
for any calendar year shall be allocated to
projects other than qualified low-income
housing projects described in subparagraph (B).
(B) Projects involving qualified nonprofit
organizations.--For purposes of subparagraph
(A), a qualified low-income housing project is
described in this subparagraph if a qualified
nonprofit organization is to own an interest in
the project (directly or through a partnership)
and materially participate (within the meaning
of section 469(h)) in the development and
operation of the project throughout the
compliance period.
(C) Qualified nonprofit organization.--For
purposes of this paragraph, the term
``qualified nonprofit organization'' means any
organization if--
(i) such organization is described in
paragraph (3) or (4) of section 501(c)
and is exempt from tax under section
501(a),
(ii) such organization is determined
by the State housing credit agency not
to be affiliated with or controlled by
a for-profit organization, and
(iii) 1 of the exempt purposes of
such organization includes the
fostering of low-income housing.
(D) Treatment of certain subsidiaries.--
(i) In general.--For purposes of this
paragraph, a qualified nonprofit
organization shall be treated as
satisfying the ownership and material
participation test of subparagraph (B)
if any qualified corporation in which
such organization holds stock satisfies
such test.
(ii) Qualified corporation.--For
purposes of clause (i), the term
``qualified corporation'' means any
corporation if 100 percent of the stock
of such corporation is held by 1 or
more qualified nonprofit organizations
at all times during the period such
corporation is in existence.
(E) State may not override set-aside.--
Nothing in subparagraph (F) of paragraph (3)
shall be construed to permit a State not to
comply with subparagraph (A) of this paragraph.
(6) Buildings eligible for credit only if minimum
long-term commitment to low-income housing.--
(A) In general.--No credit shall be allowed
by reason of this section with respect to any
building for the taxable year unless an
extended low-income housing commitment is in
effect as of the end of such taxable year.
(B) Extended low-income housing commitment.--
For purposes of this paragraph, the term
``extended low-income housing commitment''
means any agreement between the taxpayer and
the housing credit agency--
(i) which requires that the
applicable fraction (as defined in
subsection (c)(1)) for the building for
each taxable year in the extended use
period will not be less than the
applicable fraction specified in such
agreement and which prohibits the
actions described in subclauses (I) and
(II) of subparagraph (E)(ii),
(ii) which allows individuals who
meet the income limitation applicable
to the building under subsection (g)
(whether prospective, present, or
former occupants of the building) the
right to enforce in any State court the
requirement and prohibitions of clause
(i),
(iii) which prohibits the disposition
to any person of any portion of the
building to which such agreement
applies unless all of the building to
which such agreement applies is
disposed of to such person,
(iv) which prohibits the refusal to
lease to a holder of a voucher or
certificate of eligibility under
section 8 of the United States Housing
Act of 1937 because of the status of
the prospective tenant as such a
holder,
(v) which is binding on all
successors of the taxpayer, and
(vi) which, with respect to the
property, is recorded pursuant to State
law as a restrictive covenant.
(C) Allocation of credit may not exceed
amount necessary to support commitment.--
(i) In general.--The housing credit
dollar amount allocated to any building
may not exceed the amount necessary to
support the applicable fraction
specified in the extended low-income
housing commitment for such building,
including any increase in such fraction
pursuant to the application of
subsection (f)(3) if such increase is
reflected in an amended low-income
housing commitment.
(ii) Buildings financed by tax-exempt
bonds.--If paragraph (4) applies to any
building the amount of credit allowed
in any taxable year may not exceed the
amount necessary to support the
applicable fraction specified in the
extended low-income housing commitment
for such building. Such commitment may
be amended to increase such fraction.
(D) Extended use period.--For purposes of
this paragraph, the term ``extended use
period'' means the period--
(i) beginning on the 1st day in the
compliance period on which such
building is part of a qualified low-
income housing project, and
(ii) ending on the later of--
(I) the date specified by
such agency in such agreement,
or
(II) the date which is 15
years after the close of the
compliance period.
(E) Exceptions if foreclosure or if no buyer
willing to maintain low-income status.--
(i) In general.--The extended use
period for any building shall
terminate--
(I) on the date the building
is acquired by foreclosure (or
instrument in lieu of
foreclosure) unless the
Secretary determines that such
acquisition is part of an
arrangement with the taxpayer a
purpose of which is to
terminate such period, or
(II) on the last day of the
period specified in
subparagraph (I) if the housing
credit agency is unable to
present during such period a
qualified contract for the
acquisition of the low-income
portion of the building by any
person who will continue to
operate such portion as a
qualified low-income building.
Subclause (II) shall not apply to the extent
more stringent requirements are provided in the
agreement or in State law.
(ii) Eviction, etc. of existing low-
income tenants not permitted.--The
termination of an extended use period
under clause (i) shall not be construed
to permit before the close of the 3-
year period following such
termination--
(I) the eviction or the
termination of tenancy (other
than for good cause) of an
existing tenant of any low-
income unit, or
(II) any increase in the
gross rent with respect to such
unit not otherwise permitted
under this section.
(F) Qualified contract.--For purposes of
subparagraph (E), the term ``qualified
contract'' means a bona fide contract to
acquire (within a reasonable period after the
contract is entered into) the nonlow-income
portion of the building for fair market value
and the low-income portion of the building for
an amount not less than the applicable fraction
(specified in the extended low-income housing
commitment) of--
(i) the sum of--
(I) the outstanding
indebtedness secured by, or
with respect to, the building,
(II) the adjusted investor
equity in the building, plus
(III) other capital
contributions not reflected in
the amounts described in
subclause (I) or (II), reduced
by
(ii) cash distributions from (or
available for distribution from) the
project.
The Secretary shall prescribe such regulations
as may be necessary or appropriate to carry out
this paragraph, including regulations to
prevent the manipulation of the amount
determined under the preceding sentence.
(G) Adjusted investor equity.--
(i) In general.--For purposes of
subparagraph (E), the term ``adjusted
investor equity'' means, with respect
to any calendar year, the aggregate
amount of cash taxpayers invested with
respect to the project increased by the
amount equal to--
(I) such amount, multiplied
by
(II) the cost-of-living
adjustment for such calendar
year, determined under section
1(f)(3) by substituting the
base calendar year for
``calendar year 2016'' in
subparagraph (A)(ii) thereof.
An amount shall be taken into account as an
investment in the project only to the extent
there was an obligation to invest such amount
as of the beginning of the credit period and to
the extent such amount is reflected in the
adjusted basis of the project.
(ii) Cost-of-living increases in
excess of 5 percent not taken into
account.--Under regulations prescribed
by the Secretary, if the C-CPI-U for
any calendar year (as defined in
section 1(f)(6)) exceeds the C-CPI-U
for the preceding calendar year by more
than 5 percent, the C-CPI-U for the
base calendar year shall be increased
such that such excess shall never be
taken into account under clause (i). In
the case of a base calendar year before
2017, the C-CPI-U for such year shall
be determined by multiplying the CPI
for such year by the amount determined
under section 1(f)(3)(B).
(iii) Base calendar year.--For
purposes of this subparagraph, the term
``base calendar year'' means the
calendar year with or within which the
1st taxable year of the credit period
ends.
(H) Low-income portion.--For purposes of this
paragraph, the low-income portion of a building
is the portion of such building equal to the
applicable fraction specified in the extended
low-income housing commitment for the building.
(I) Period for finding buyer.--The period
referred to in this subparagraph is the 1-year
period beginning on the date (after the 14th
year of the compliance period) the taxpayer
submits a written request to the housing credit
agency to find a person to acquire the
taxpayer's interest in the low-income portion
of the building.
(J) Effect of noncompliance.--If, during a
taxable year, there is a determination that an
extended low-income housing agreement was not
in effect as of the beginning of such year,
such determination shall not apply to any
period before such year and subparagraph (A)
shall be applied without regard to such
determination if the failure is corrected
within 1 year from the date of the
determination.
(K) Projects which consist of more than 1
building.--The application of this paragraph to
projects which consist of more than 1 building
shall be made under regulations prescribed by
the Secretary.
(7) Special rules.--
(A) Building must be located within
jurisdiction of credit agency.--A housing
credit agency may allocate its aggregate
housing credit dollar amount only to buildings
located in the jurisdiction of the governmental
unit of which such agency is a part.
(B) Agency allocations in excess of limit.--
If the aggregate housing credit dollar amounts
allocated by a housing credit agency for any
calendar year exceed the portion of the State
housing credit ceiling allocated to such agency
for such calendar year, the housing credit
dollar amounts so allocated shall be reduced
(to the extent of such excess) for buildings in
the reverse of the order in which the
allocations of such amounts were made.
(C) Credit reduced if allocated credit dollar
amount is less than credit which would be
allowable without regard to placed in service
convention, etc..--
(i) In general.--The amount of the
credit determined under this section
with respect to any building shall not
exceed the clause (ii) percentage of
the amount of the credit which would
(but for this subparagraph) be
determined under this section with
respect to such building.
(ii) Determination of percentage.--
For purposes of clause (i), the clause
(ii) percentage with respect to any
building is the percentage which--
(I) the housing credit dollar
amount allocated to such
building bears to
(II) the credit amount
determined in accordance with
clause (iii).
(iii) Determination of credit
amount.--The credit amount determined
in accordance with this clause is the
amount of the credit which would (but
for this subparagraph) be determined
under this section with respect to the
building if--
(I) this section were applied
without regard to paragraphs
(2)(A) and (3)(B) of subsection
(f), and
(II) subsection (f)(3)(A)
were applied without regard to
``the percentage equal to 2/3
of''.
(D) Housing credit agency to specify
applicable percentage and maximum qualified
basis.--In allocating a housing credit dollar
amount to any building, the housing credit
agency shall specify the applicable percentage
and the maximum qualified basis which may be
taken into account under this section with
respect to such building. The applicable
percentage and maximum qualified basis so
specified shall not exceed the applicable
percentage and qualified basis determined under
this section without regard to this subsection.
(8) Other definitions.--For purposes of this
subsection--
(A) Housing credit agency.--The term
``housing credit agency'' means any agency
authorized to carry out this subsection.
(B) Possessions treated as States.--The term
``State'' includes a possession of the United
States.
(i) Definitions and special rules.--For purposes of this
section--
(1) Compliance period.--The term ``compliance
period'' means, with respect to any building, the
period of 15 taxable years beginning with the 1st
taxable year of the credit period with respect thereto.
(2) Determination of whether building is federally
subsidized.--
(A) In general.--Except as otherwise provided
in this paragraph, for purposes of subsection
(b)(1), a new building shall be treated as
federally subsidized for any taxable year if,
at any time during such taxable year or any
prior taxable year, there is or was outstanding
any obligation the interest on which is exempt
from tax under section 103 the proceeds of
which are or were used (directly or indirectly)
with respect to such building or the operation
thereof.
(B) Election to reduce eligible basis by
proceeds of obligations.--A tax-exempt
obligation shall not be taken into account
under subparagraph (A) if the taxpayer elects
to exclude from the eligible basis of the
building for purposes of subsection (d) the
proceeds of such obligation.
(C) Special rule for subsidized construction
financing.--Subparagraph (A) shall not apply to
any tax-exempt obligation used to provide
construction financing for any building if--
(i) such obligation (when issued)
identified the building for which the
proceeds of such obligation would be
used, and
(ii) such obligation is redeemed
before such building is placed in
service.
(3) Low-income unit.--
(A) In general.--The term ``low-income unit''
means any unit in a building if--
(i) such unit is rent-restricted (as
defined in subsection (g)(2)), and
(ii) the individuals occupying such
unit meet the income limitation
applicable under subsection (g)(1) to
the project of which such building is a
part.
(B) Exceptions.--
(i) In general.--A unit shall not be
treated as a low-income unit unless the
unit is suitable for occupancy and used
other than on a transient basis.
(ii) Suitability for occupancy.--For
purposes of clause (i), the suitability
of a unit for occupancy shall be
determined under regulations prescribed
by the Secretary taking into account
local health, safety, and building
codes.
(iii) Transitional housing for
homeless.--For purposes of clause (i),
a unit shall be considered to be used
other than on a transient basis if the
unit contains sleeping accommodations
and kitchen and bathroom facilities and
is located in a building--
(I) which is used exclusively
to facilitate the transition of
homeless individuals (within
the meaning of section 103 of
the McKinney-Vento Homeless
Assistance Act (42 U.S.C.
11302), as in effect on the
date of the enactment of this
clause) to independent living
within 24 months, and
(II) in which a governmental
entity or qualified nonprofit
organization (as defined in
subsection (h)(5)) provides
such individuals with temporary
housing and supportive services
designed to assist such
individuals in locating and
retaining permanent housing.
(iv) Single-room occupancy units.--
For purposes of clause (i), a single-
room occupancy unit shall not be
treated as used on a transient basis
merely because it is rented on a month-
by-month basis.
(C) Special rule for buildings having 4 or
fewer units.--In the case of any building which
has 4 or fewer residential rental units, no
unit in such building shall be treated as a
low-income unit if the units in such building
are owned by--
(i) any individual who occupies a
residential unit in such building, or
(ii) any person who is related (as
defined in subsection (d)(2)(D)(iii))
to such individual.
(D) Certain students not to disqualify
unit.--A unit shall not fail to be treated as a
low-income unit merely because it is occupied--
(i) by an individual who is--
(I) a student and receiving
assistance under title IV of
the Social Security Act,
(II) a student who was
previously under the care and
placement responsibility of the
State agency responsible for
administering a plan under part
B or part E of title IV of the
Social Security Act, or
(III) enrolled in a job
training program receiving
assistance under the Job
Training Partnership Act or
under other similar Federal,
State, or local laws, or
(ii) entirely by full-time students
if such students are--
(I) single parents and their
children and such parents are
not dependents (as defined in
section 152, determined without
regard to subsections (b)(1),
(b)(2), and (d)(1)(B) thereof)
of another individual and such
children are not dependents (as
so defined) of another
individual other than a parent
of such children, or
(II) married and file a joint
return.
(E) Owner-occupied buildings having 4 or
fewer units eligible for credit where
development plan.--
(i) In general.--Subparagraph (C)
shall not apply to the acquisition or
rehabilitation of a building pursuant
to a development plan of action
sponsored by a State or local
government or a qualified nonprofit
organization (as defined in subsection
(h)(5)(C)).
(ii) Limitation on credit.--In the
case of a building to which clause (i)
applies, the applicable fraction shall
not exceed 80 percent of the unit
fraction.
(iii) Certain unrented units treated
as owner-occupied.--In the case of a
building to which clause (i) applies,
any unit which is not rented for 90
days or more shall be treated as
occupied by the owner of the building
as of the 1st day it is not rented.
(4) New building.--The term ``new building'' means a
building the original use of which begins with the
taxpayer.
(5) Existing building.--The term ``existing
building'' means any building which is not a new
building.
(6) Application to estates and trusts.--In the case
of an estate or trust, the amount of the credit
determined under subsection (a) and any increase in tax
under subsection (j) shall be apportioned between the
estate or trust and the beneficiaries on the basis of
the income of the estate or trust allocable to each.
(7) Impact of tenant's right of 1st refusal to
acquire property.--
(A) In general.--No Federal income tax
benefit shall fail to be allowable to the
taxpayer with respect to any qualified low-
income building merely by reason of a right of
1st refusal held by the tenants (in cooperative
form or otherwise) or resident management
corporation of such building or by a qualified
nonprofit organization (as defined in
subsection (h)(5)(C)) or government agency to
purchase the property after the close of the
compliance period for a price which is not less
than the minimum purchase price determined
under subparagraph (B).
(B) Minimum purchase price.--For purposes of
subparagraph (A), the minimum purchase price
under this subparagraph is an amount equal to
the sum of--
(i) the principal amount of
outstanding indebtedness secured by the
building (other than indebtedness
incurred within the 5-year period
ending on the date of the sale to the
tenants), and
(ii) all Federal, State, and local
taxes attributable to such sale.
Except in the case of Federal income taxes,
there shall not be taken into account under
clause (ii) any additional tax attributable to
the application of clause (ii).
(8) Treatment of rural projects.--For purposes of
this section, in the case of any project for
residential rental property located in a rural area (as
defined in section 520 of the Housing Act of 1949), any
income limitation measured by reference to area median
gross income shall be measured by reference to the
greater of area median gross income or national non-
metropolitan median income. The preceding sentence
shall not apply with respect to any building if
paragraph (1) of section 42(h) does not apply by reason
of paragraph (4) thereof to any portion of the credit
determined under this section with respect to such
building.
(9) Coordination with low-income housing grants.--
(A) Reduction in State housing credit ceiling
for low-income housing grants received in
2009.--For purposes of this section, the
amounts described in clauses (i) through (iv)
of subsection (h)(3)(C) with respect to any
State for 2009 shall each be reduced by so much
of such amount as is taken into account in
determining the amount of any grant to such
State under section 1602 of the American
Recovery and Reinvestment Tax Act of 2009.
(B) Special rule for basis.--Basis of a
qualified low-income building shall not be
reduced by the amount of any grant described in
subparagraph (A).
(j) Recapture of credit.--
(1) In general.--If--
(A) as of the close of any taxable year in
the compliance period, the amount of the
qualified basis of any building with respect to
the taxpayer is less than
(B) the amount of such basis as of the close
of the preceding taxable year,
then the taxpayer's tax under this chapter for the
taxable year shall be increased by the credit recapture
amount.
(2) Credit recapture amount.--For purposes of
paragraph (1), the credit recapture amount is an amount
equal to the sum of--
(A) the aggregate decrease in the credits
allowed to the taxpayer under section 38 for
all prior taxable years which would have
resulted if the accelerated portion of the
credit allowable by reason of this section were
not allowed for all prior taxable years with
respect to the excess of the amount described
in paragraph (1)(B) over the amount described
in paragraph (1)(A), plus
(B) interest at the overpayment rate
established under section 6621 on the amount
determined under subparagraph (A) for each
prior taxable year for the period beginning on
the due date for filing the return for the
prior taxable year involved.
No deduction shall be allowed under this chapter for
interest described in subparagraph (B).
(3) Accelerated portion of credit.--For purposes of
paragraph (2), the accelerated portion of the credit
for the prior taxable years with respect to any amount
of basis is the excess of--
(A) the aggregate credit allowed by reason of
this section (without regard to this
subsection) for such years with respect to such
basis, over
(B) the aggregate credit which would be
allowable by reason of this section for such
years with respect to such basis if the
aggregate credit which would (but for this
subsection) have been allowable for the entire
compliance period were allowable ratably over
15 years.
(4) Special rules.--
(A) Tax benefit rule.--The tax for the
taxable year shall be increased under paragraph
(1) only with respect to credits allowed by
reason of this section which were used to
reduce tax liability. In the case of credits
not so used to reduce tax liability, the
carryforwards and carrybacks under section 39
shall be appropriately adjusted.
(B) Only basis for which credit allowed taken
into account.--Qualified basis shall be taken
into account under paragraph (1)(B) only to the
extent such basis was taken into account in
determining the credit under subsection (a) for
the preceding taxable year referred to in such
paragraph.
(C) No recapture of additional credit
allowable by reason of subsection (f)(3).--
Paragraph (1) shall apply to a decrease in
qualified basis only to the extent such
decrease exceeds the amount of qualified basis
with respect to which a credit was allowable
for the taxable year referred to in paragraph
(1)(B) by reason of subsection (f)(3).
(D) No credits against tax.--Any increase in
tax under this subsection shall not be treated
as a tax imposed by this chapter for purposes
of determining the amount of any credit under
this chapter.
(E) No recapture by reason of casualty
loss.--The increase in tax under this
subsection shall not apply to a reduction in
qualified basis by reason of a casualty loss to
the extent such loss is restored by
reconstruction or replacement within a
reasonable period established by the Secretary.
(F) No recapture where de minimis changes in
floor space.--The Secretary may provide that
the increase in tax under this subsection shall
not apply with respect to any building if--
(i) such increase results from a de
minimis change in the floor space
fraction under subsection (c)(1), and
(ii) the building is a qualified low-
income building after such change.
(5) Certain partnerships treated as the taxpayer.--
(A) In general.--For purposes of applying
this subsection to a partnership to which this
paragraph applies--
(i) such partnership shall be treated
as the taxpayer to which the credit
allowable under subsection (a) was
allowed,
(ii) the amount of such credit
allowed shall be treated as the amount
which would have been allowed to the
partnership were such credit allowable
to such partnership,
(iii) paragraph (4)(A) shall not
apply, and
(iv) the amount of the increase in
tax under this subsection for any
taxable year shall be allocated among
the partners of such partnership in the
same manner as such partnership's
taxable income for such year is
allocated among such partners.
(B) Partnerships to which paragraph
applies.--This paragraph shall apply to any
partnership which has 35 or more partners
unless the partnership elects not to have this
paragraph apply.
(C) Special rules.--
[(i) Husband and wife treated as 1
partner.--For purposes of subparagraph
(B)(i), a husband and wife (and their
estates) shall be treated as 1
partner.]
(i) Married couple treated as 1
partner.--For purposes of subparagraph
(B), individuals married to one another
(and their estates) shall be treated as
1 partner.
(ii) Election irrevocable.--Any
election under subparagraph (B), once
made, shall be irrevocable.
(6) No recapture on disposition of building which
continues in qualified use.--
(A) In general.--The increase in tax under
this subsection shall not apply solely by
reason of the disposition of a building (or an
interest therein) if it is reasonably expected
that such building will continue to be operated
as a qualified low-income building for the
remaining compliance period with respect to
such building.
(B) Statute of limitations.--If a building
(or an interest therein) is disposed of during
any taxable year and there is any reduction in
the qualified basis of such building which
results in an increase in tax under this
subsection for such taxable or any subsequent
taxable year, then--
(i) the statutory period for the
assessment of any deficiency with
respect to such increase in tax shall
not expire before the expiration of 3
years from the date the Secretary is
notified by the taxpayer (in such
manner as the Secretary may prescribe)
of such reduction in qualified basis,
and
(ii) such deficiency may be assessed
before the expiration of such 3-year
period notwithstanding the provisions
of any other law or rule of law which
would otherwise prevent such
assessment.
(k) Application of at-risk rules.--For purposes of this
section--
(1) In general.--Except as otherwise provided in this
subsection, rules similar to the rules of section
49(a)(1) (other than subparagraphs (D)(ii)(II) and
(D)(iv)(I) thereof), section 49(a)(2), and section
49(b)(1) shall apply in determining the qualified basis
of any building in the same manner as such sections
apply in determining the credit base of property.
(2) Special rules for determining qualified person.--
For purposes of paragraph (1)--
(A) In general.--If the requirements of
subparagraphs (B), (C), and (D) are met with
respect to any financing borrowed from a
qualified nonprofit organization (as defined in
subsection (h)(5)), the determination of
whether such financing is qualified commercial
financing with respect to any qualified low-
income building shall be made without regard to
whether such organization--
(i) is actively and regularly engaged
in the business of lending money, or
(ii) is a person described in section
49(a)(1)(D)(iv)(II).
(B) Financing secured by property.--The
requirements of this subparagraph are met with
respect to any financing if such financing is
secured by the qualified low-income building,
except that this subparagraph shall not apply
in the case of a federally assisted building
described in subsection (d)(6)(C) if--
(i) a security interest in such
building is not permitted by a Federal
agency holding or insuring the mortgage
secured by such building, and
(ii) the proceeds from the financing
(if any) are applied to acquire or
improve such building.
(C) Portion of building attributable to
financing.--The requirements of this
subparagraph are met with respect to any
financing for any taxable year in the
compliance period if, as of the close of such
taxable year, not more than 60 percent of the
eligible basis of the qualified low-income
building is attributable to such financing
(reduced by the principal and interest of any
governmental financing which is part of a wrap-
around mortgage involving such financing).
(D) Repayment of principal and interest.--The
requirements of this subparagraph are met with
respect to any financing if such financing is
fully repaid on or before the earliest of--
(i) the date on which such financing
matures,
(ii) the 90th day after the close of
the compliance period with respect to
the qualified low-income building, or
(iii) the date of its refinancing or
the sale of the building to which such
financing relates.
In the case of a qualified nonprofit
organization which is not described in section
49(a)(1)(D)(iv)(II) with respect to a building,
clause (ii) of this subparagraph shall be
applied as if the date described therein were
the 90th day after the earlier of the date the
building ceases to be a qualified low-income
building or the date which is 15 years after
the close of a compliance period with respect
thereto.
(3) Present value of financing.--If the rate of
interest on any financing described in paragraph (2)(A)
is less than the rate which is 1 percentage point below
the applicable Federal rate as of the time such
financing is incurred, then the qualified basis (to
which such financing relates) of the qualified low-
income building shall be the present value of the
amount of such financing, using as the discount rate
such applicable Federal rate. For purposes of the
preceding sentence, the rate of interest on any
financing shall be determined by treating interest to
the extent of government subsidies as not payable.
(4) Failure to fully repay.--
(A) In general.--To the extent that the
requirements of paragraph (2)(D) are not met,
then the taxpayer's tax under this chapter for
the taxable year in which such failure occurs
shall be increased by an amount equal to the
applicable portion of the credit under this
section with respect to such building,
increased by an amount of interest for the
period--
(i) beginning with the due date for
the filing of the return of tax imposed
by chapter 1 for the 1st taxable year
for which such credit was allowable,
and
(ii) ending with the due date for the
taxable year in which such failure
occurs,
determined by using the underpayment rate and
method under section 6621.
(B) Applicable portion.--For purposes of
subparagraph (A), the term ``applicable
portion'' means the aggregate decrease in the
credits allowed to a taxpayer under section 38
for all prior taxable years which would have
resulted if the eligible basis of the building
were reduced by the amount of financing which
does not meet requirements of paragraph (2)(D).
(C) Certain rules to apply.--Rules similar to
the rules of subparagraphs (A) and (D) of
subsection (j)(4) shall apply for purposes of
this subsection.
(l) Certifications and other reports to Secretary.--
(1) Certification with respect to 1st year of credit
period.--Following the close of the 1st taxable year in
the credit period with respect to any qualified low-
income building, the taxpayer shall certify to the
Secretary (at such time and in such form and in such
manner as the Secretary prescribes)--
(A) the taxable year, and calendar year, in
which such building was placed in service,
(B) the adjusted basis and eligible basis of
such building as of the close of the 1st year
of the credit period,
(C) the maximum applicable percentage and
qualified basis permitted to be taken into
account by the appropriate housing credit
agency under subsection (h),
(D) the election made under subsection (g)
with respect to the qualified low-income
housing project of which such building is a
part, and
(E) such other information as the Secretary
may require.
In the case of a failure to make the certification
required by the preceding sentence on the date
prescribed therefor, unless it is shown that such
failure is due to reasonable cause and not to willful
neglect, no credit shall be allowable by reason of
subsection (a) with respect to such building for any
taxable year ending before such certification is made.
(2) Annual reports to the Secretary.--The Secretary
may require taxpayers to submit an information return
(at such time and in such form and manner as the
Secretary prescribes) for each taxable year setting
forth--
(A) the qualified basis for the taxable year
of each qualified low-income building of the
taxpayer,
(B) the information described in paragraph
(1)(C) for the taxable year, and
(C) such other information as the Secretary
may require.
The penalty under section 6652(j) shall apply to any
failure to submit the return required by the Secretary
under the preceding sentence on the date prescribed
therefor.
(3) Annual reports from housing credit agencies.--
Each agency which allocates any housing credit amount
to any building for any calendar year shall submit to
the Secretary (at such time and in such manner as the
Secretary shall prescribe) an annual report
specifying--
(A) the amount of housing credit amount
allocated to each building for such year,
(B) sufficient information to identify each
such building and the taxpayer with respect
thereto, and
(C) such other information as the Secretary
may require.
The penalty under section 6652(j) shall apply to any
failure to submit the report required by the preceding
sentence on the date prescribed therefor.
(m) Responsibilities of housing credit agencies.--
(1) Plans for allocation of credit among projects.--
(A) In general.--Notwithstanding any other
provision of this section, the housing credit
dollar amount with respect to any building
shall be zero unless--
(i) such amount was allocated
pursuant to a qualified allocation plan
of the housing credit agency which is
approved by the governmental unit (in
accordance with rules similar to the
rules of section 147(f)(2) (other than
subparagraph (B)(ii) thereof)) of which
such agency is a part,
(ii) such agency notifies the chief
executive officer (or the equivalent)
of the local jurisdiction within which
the building is located of such project
and provides such individual a
reasonable opportunity to comment on
the project,
(iii) a comprehensive market study of
the housing needs of low-income
individuals in the area to be served by
the project is conducted before the
credit allocation is made and at the
developer's expense by a disinterested
party who is approved by such agency,
and
(iv) a written explanation is
available to the general public for any
allocation of a housing credit dollar
amount which is not made in accordance
with established priorities and
selection criteria of the housing
credit agency.
(B) Qualified allocation plan.--For purposes
of this paragraph, the term ``qualified
allocation plan'' means any plan--
(i) which sets forth selection
criteria to be used to determine
housing priorities of the housing
credit agency which are appropriate to
local conditions,
(ii) which also gives preference in
allocating housing credit dollar
amounts among selected projects to--
(I) projects serving the
lowest income tenants,
(II) projects obligated to
serve qualified tenants for the
longest periods, and
(III) projects which are
located in qualified census
tracts (as defined in
subsection (d)(5)(B)(ii)) and
the development of which
contributes to a concerted
community revitalization plan,
and
(iii) which provides a procedure that
the agency (or an agent or other
private contractor of such agency) will
follow in monitoring for noncompliance
with the provisions of this section and
in notifying the Internal Revenue
Service of such noncompliance which
such agency becomes aware of and in
monitoring for noncompliance with
habitability standards through regular
site visits.
(C) Certain selection criteria must be
used.--The selection criteria set forth in a
qualified allocation plan must include
(i) project location,
(ii) housing needs characteristics,
(iii) project characteristics,
including whether the project includes
the use of existing housing as part of
a community revitalization plan,
(iv) sponsor characteristics,
(v) tenant populations with special
housing needs,
(vi) public housing waiting lists,
(vii) tenant populations of
individuals with children,
(viii) projects intended for eventual
tenant ownership,
(ix) the energy efficiency of the
project, and
(x) the historic nature of the
project.
(D) Application to bond financed projects.--
Subsection (h)(4) shall not apply to any
project unless the project satisfies the
requirements for allocation of a housing credit
dollar amount under the qualified allocation
plan applicable to the area in which the
project is located.
(2) Credit allocated to building not to exceed amount
necessary to assure project feasibility.--
(A) In general.--The housing credit dollar
amount allocated to a project shall not exceed
the amount the housing credit agency determines
is necessary for the financial feasibility of
the project and its viability as a qualified
low-income housing project throughout the
credit period.
(B) Agency evaluation.--In making the
determination under subparagraph (A), the
housing credit agency shall consider--
(i) the sources and uses of funds and
the total financing planned for the
project,
(ii) any proceeds or receipts
expected to be generated by reason of
tax benefits,
(iii) the percentage of the housing
credit dollar amount used for project
costs other than the cost of
intermediaries, and
(iv) the reasonableness of the
developmental and operational costs of
the project.
Clause (iii) shall not be applied so as to
impede the development of projects in hard-to-
develop areas. Such a determination shall not
be construed to be a representation or warranty
as to the feasibility or viability of the
project.
(C) Determination made when credit amount
applied for and when building placed in
service.--
(i) In general.--A determination
under subparagraph (A) shall be made as
of each of the following times:
(I) The application for the
housing credit dollar amount.
(II) The allocation of the
housing credit dollar amount.
(III) The date the building
is placed in service.
(ii) Certification as to amount of
other subsidies.--Prior to each
determination under clause (i), the
taxpayer shall certify to the housing
credit agency the full extent of all
Federal, State, and local subsidies
which apply (or which the taxpayer
expects to apply) with respect to the
building.
(D) Application to bond financed projects.--
Subsection (h)(4) shall not apply to any
project unless the governmental unit which
issued the bonds (or on behalf of which the
bonds were issued) makes a determination under
rules similar to the rules of subparagraphs (A)
and (B).
(n) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section, including regulations--
(1) dealing with--
(A) projects which include more than 1
building or only a portion of a building,
(B) buildings which are placed in service in
portions,
(2) providing for the application of this section to
short taxable years,
(3) preventing the avoidance of the rules of this
section, and
(4) providing the opportunity for housing credit
agencies to correct administrative errors and omissions
with respect to allocations and record keeping within a
reasonable period after their discovery, taking into
account the availability of regulations and other
administrative guidance from the Secretary.
Subchapter B--COMPUTATION OF TAXABLE INCOME
* * * * * * *
PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
INCOME, ETC.
* * * * * * *
SEC. 62. ADJUSTED GROSS INCOME DEFINED.
(a) General rule.--For purposes of this subtitle, the term
``adjusted gross income'' means, in the case of an individual,
gross income minus the following deductions:
(1) Trade and business deductions.--The deductions
allowed by this chapter (other than by part VII of this
subchapter) which are attributable to a trade or
business carried on by the taxpayer, if such trade or
business does not consist of the performance of
services by the taxpayer as an employee.
(2) Certain trade and business deductions of
employees.--
(A) Reimbursed expenses of employees.--The
deductions allowed by part VI (section 161 and
following) which consist of expenses paid or
incurred by the taxpayer, in connection with
the performance by him of services as an
employee, under a reimbursement or other
expense allowance arrangement with his
employer. The fact that the reimbursement may
be provided by a third party shall not be
determinative of whether or not the preceding
sentence applies.
(B) Certain expenses of performing artists.--
The deductions allowed by section 162 which
consist of expenses paid or incurred by a
qualified performing artist in connection with
the performances by him of services in the
performing arts as an employee.
(C) Certain expenses of officials.--The
deductions allowed by section 162 which consist
of expenses paid or incurred with respect to
services performed by an official as an
employee of a State or a political subdivision
thereof in a position compensated in whole or
in part on a fee basis.
(D) Certain expenses of elementary and
secondary school teachers.--The deductions
allowed by section 162 which consist of
expenses, not in excess of $250, paid or
incurred by an eligible educator--
(i) by reason of the participation of
the educator in professional
development courses related to the
curriculum in which the educator
provides instruction or to the students
for which the educator provides
instruction, and
(ii) in connection with books,
supplies (other than nonathletic
supplies for courses of instruction in
health or physical education), computer
equipment (including related software
and services) and other equipment, and
supplementary materials used by the
eligible educator in the classroom.
(E) Certain expenses of members of reserve
components of the Armed Forces of the United
States.--The deductions allowed by section 162
which consist of expenses, determined at a rate
not in excess of the rates for travel expenses
(including per diem in lieu of subsistence)
authorized for employees of agencies under
subchapter I of chapter 57 of title 5, United
States Code, paid or incurred by the taxpayer
in connection with the performance of services
by such taxpayer as a member of a reserve
component of the Armed Forces of the United
States for any period during which such
individual is more than 100 miles away from
home in connection with such services.
(3) Losses from sale or exchange of property.--The
deductions allowed by part VI (sec. 161 and following)
as losses from the sale or exchange of property.
(4) Deductions attributable to rents and royalties.--
The deductions allowed by part VI (sec. 161 and
following), by section 212 (relating to expenses for
production of income), and by section 611 (relating to
depletion) which are attributable to property held for
the production of rents or royalties.
(5) Certain deductions of life tenants and income
beneficiaries of property.--In the case of a life
tenant of property, or an income beneficiary of
property held in trust, or an heir, legatee, or devisee
of an estate, the deduction for depreciation allowed by
section 167 and the deduction allowed by section 611.
(6) Pension, profit-sharing, and annuity plans of
self-employed individuals.--In the case of an
individual who is an employee within the meaning of
section 401(c)(1), the deduction allowed by section
404.
(7) Retirement savings.--The deduction allowed by
section 219 (relating to deduction of certain
retirement savings).
(9) Penalties forfeited because of premature
withdrawal of funds from time savings accounts or
deposits.--The deductions allowed by section 165 for
losses incurred in any transaction entered into for
profit, though not connected with a trade or business,
to the extent that such losses include amounts
forfeited to a bank, mutual savings bank, savings and
loan association, building and loan association,
cooperative bank or homestead association as a penalty
for premature withdrawal of funds from a time savings
account, certificate of deposit, or similar class of
deposit.
(11) Reforestation expenses.--The deduction allowed
by section 194.
(12) Certain required repayments of supplemental
unemployment compensation benefits.--The deduction
allowed by section 165 for the repayment to a trust
described in paragraph (9) or (17) of section 501(c) of
supplemental unemployment compensation benefits
received from such trust if such repayment is required
because of the receipt of trade readjustment allowances
under section 231 or 232 of the Trade Act of 1974 (19
U.S.C. 2291 and 2292).
(13) Jury duty pay remitted to employer.--Any
deduction allowable under this chapter by reason of an
individual remitting any portion of any jury pay to
such individual's employer in exchange for payment by
the employer of compensation for the period such
individual was performing jury duty. For purposes of
the preceding sentence, the term ``jury pay'' means any
payment received by the individual for the discharge of
jury duty.
(15) Moving expenses.--The deduction allowed by
section 217.
(16) Archer MSAs.--The deduction allowed by section
220.
(17) Interest on education loans.--The deduction
allowed by section 221.
(18) Higher education expenses.--The deduction
allowed by section 222.
(19) Health savings accounts.--The deduction allowed
by section 223.
(20) Costs involving discrimination suits, etc..--Any
deduction allowable under this chapter for attorney
fees and court costs paid by, or on behalf of, the
taxpayer in connection with any action involving a
claim of unlawful discrimination (as defined in
subsection (e)) or a claim of a violation of subchapter
III of chapter 37 of title 31, United States Code, or a
claim made under section 1862(b)(3)(A) of the Social
Security Act (42 U.S.C. 1395y(b)(3)(A)). The preceding
sentence shall not apply to any deduction in excess of
the amount includible in the taxpayer's gross income
for the taxable year on account of a judgment or
settlement (whether by suit or agreement and whether as
lump sum or periodic payments) resulting from such
claim.
(21) Attorneys' fees relating to awards to
whistleblowers.--
(A) In general.--Any deduction allowable
under this chapter for attorney fees and court
costs paid by, or on behalf of, the taxpayer in
connection with any award under--
(i) section 7623(b), or
(ii) in the case of taxable years
beginning after December 31, 2017, any
action brought under--
(I) section 21F of the
Securities Exchange Act of 1934
(15 U.S.C. 78u-6),
(II) a State false claims
act, including a State false
claims act with qui tam
provisions, or
(III) section 23 of the
Commodity Exchange Act (7
U.S.C. 26).
(B) May not exceed award.--Subparagraph (A)
shall not apply to any deduction in excess of
the amount includible in the taxpayer's gross
income for the taxable year on account of such
award.
Nothing in this section shall permit the same item to be
deducted more than once. Any deduction allowed by section 199A
shall not be treated as a deduction described in any of the
preceding paragraphs of this subsection.
(b) Qualified performing artist.--
(1) In general.--For purposes of subsection
(a)(2)(B), the term ``qualified performing artist''
means, with respect to any taxable year, any individual
if--
(A) such individual performed services in the
performing arts as an employee during the
taxable year for at least 2 employers,
(B) the aggregate amount allowable as a
deduction under section 162 in connection with
the performance of such services exceeds 10
percent of such individual's gross income
attributable to the performance of such
services, and
(C) the adjusted gross income of such
individual for the taxable year (determined
without regard to subsection (a)(2)(B)) does
not exceed $16,000.
(2) Nominal employer not taken into account.--An
individual shall not be treated as performing services
in the performing arts as an employee for any employer
during any taxable year unless the amount received by
such individual from such employer for the performance
of such services during the taxable year equals or
exceeds $200.
(3) Special rules for married couples.--
(A) In general.--Except in the case of a
[husband and wife who lived apart] married
couple who lived apart at all times during the
taxable year, if the taxpayer is married at the
close of the taxable year, subsection (a)(2)(B)
shall apply only if [the taxpayer and his
spouse] the taxpayer and the spouse of the
taxpayer file a joint return for the taxable
year.
(B) Application of paragraph (1).--In the
case of a joint return--
(i) paragraph (1) (other than
subparagraph (C) thereof) shall be
applied separately with respect to each
spouse, but
(ii) paragraph (1)(C) shall be
applied with respect to their combined
adjusted gross income.
(C) Determination of marital status.--For
purposes of this subsection, marital status
shall be determined under section 7703(a).
(D) Joint return.--For purposes of this
subsection, the term ``joint return'' means the
joint return of a [husband and wife] married
couple made under section 6013.
(c) Certain arrangements not treated as reimbursement
arrangements.--For purposes of subsection (a)(2)(A), an
arrangement shall in no event be treated as a reimbursement or
other expense allowance arrangement if--
(1) such arrangement does not require the employee to
substantiate the expenses covered by the arrangement to
the person providing the reimbursement, or
(2) such arrangement provides the employee the right
to retain any amount in excess of the substantiated
expenses covered under the arrangement.
The substantiation requirements of the preceding sentence shall
not apply to any expense to the extent that substantiation is
not required under section 274(d) for such expense by reason of
the regulations prescribed under the 2nd sentence thereof.
(d) Definition; special rules.--
(1) Eligible educator.--
(A) In general.--For purposes of subsection
(a)(2)(D), the term ``eligible educator''
means, with respect to any taxable year, an
individual who is a kindergarten through grade
12 teacher, instructor, counselor, principal,
or aide in a school for at least 900 hours
during a school year.
(B) School.--The term ``school'' means any
school which provides elementary education or
secondary education (kindergarten through grade
12), as determined under State law.
(2) Coordination with exclusions.--A deduction shall
be allowed under subsection (a)(2)(D) for expenses only
to the extent the amount of such expenses exceeds the
amount excludable under section 135, 529(c)(1), or
530(d)(2) for the taxable year.
(3) Inflation adjustment.--In the case of any taxable
year beginning after 2015, the $250 amount in
subsection (a)(2)(D) shall be increased by an amount
equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by
substituting ``calendar year 2014'' for
``calendar year 2016'' in subparagraph (A)(ii)
thereof.
Any increase determined under the preceding sentence
shall be rounded to the nearest multiple of $50.
(e) Unlawful discrimination defined.--For purposes of
subsection (a)(20), the term ``unlawful discrimination'' means
an act that is unlawful under any of the following:
(1) Section 302 of the Civil Rights Act of 1991 (42
U.S.C. 2000e-16b).
(2) Section 201, 202, 203, 204, 205, 206, or 207 of
the Congressional Accountability Act of 1995 (2 U.S.C.
1311, 1312, 1313, 1314, 1315, 1316, or 1317).
(3) The National Labor Relations Act (29 U.S.C. 151
et seq.).
(4) The Fair Labor Standards Act of 1938 (29 U.S.C.
201 et seq.).
(5) Section 4 or 15 of the Age Discrimination in
Employment Act of 1967 (29 U.S.C. 623 or 633a).
(6) Section 501 or 504 of the Rehabilitation Act of
1973 (29 U.S.C. 791 or 794).
(7) Section 510 of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1140).
(8) Title IX of the Education Amendments of 1972 (20
U.S.C. 1681 et seq.).
(9) The Employee Polygraph Protection Act of 1988 (29
U.S.C. 2001 et seq.).
(10) The Worker Adjustment and Retraining
Notification Act (29 U.S.C. 2102 et seq.).
(11) Section 105 of the Family and Medical Leave Act
of 1993 (29 U.S.C. 2615).
(12) Chapter 43 of title 38, United States Code
(relating to employment and reemployment rights of
members of the uniformed services).
(13) Section 1977, 1979, or 1980 of the Revised
Statutes (42 U.S.C. 1981, 1983, or 1985).
(14) Section 703, 704, or 717 of the Civil Rights Act
of 1964 (42 U.S.C. 2000e-2, 2000e-3, or 2000e-16).
(15) Section 804, 805, 806, 808, or 818 of the Fair
Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or
3617).
(16) Section 102, 202, 302, or 503 of the Americans
with Disabilities Act of 1990 (42 U.S.C. 12112, 12132,
12182, or 12203).
(17) Any provision of Federal law (popularly known as
whistleblower protection provisions) prohibiting the
discharge of an employee, the discrimination against an
employee, or any other form of retaliation or reprisal
against an employee for asserting rights or taking
other actions permitted under Federal law.
(18) Any provision of Federal, State, or local law,
or common law claims permitted under Federal, State, or
local law--
(i) providing for the enforcement of civil
rights, or
(ii) regulating any aspect of the employment
relationship, including claims for wages,
compensation, or benefits, or prohibiting the
discharge of an employee, the discrimination
against an employee, or any other form of
retaliation or reprisal against an employee for
asserting rights or taking other actions
permitted by law.
SEC. 63. TAXABLE INCOME DEFINED.
(a) In general.--Except as provided in subsection (b), for
purposes of this subtitle, the term ``taxable income'' means
gross income minus the deductions allowed by this chapter
(other than the standard deduction).
(b) Individuals who do not itemize their deductions.--In the
case of an individual who does not elect to itemize his
deductions for the taxable year, for purposes of this subtitle,
the term ``taxable income'' means adjusted gross income,
minus--
(1) the standard deduction,
(2) the deduction for personal exemptions provided in
section 151, and
(3) any deduction provided in section 199A.
(c) Standard deduction.--For purposes of this subtitle--
(1) In general.--Except as otherwise provided in this
subsection, the term ``standard deduction'' means the
sum of--
(A) the basic standard deduction, and
(B) the additional standard deduction.
(2) Basic standard deduction.--For purposes of
paragraph (1), the basic standard deduction is--
(A) 200 percent of the dollar amount in
effect under subparagraph (C) for the taxable
year in the case of--
(i) a joint return, or
(ii) a surviving spouse (as defined
in section 2(a)),
(B) $4,400 in the case of a head of household
(as defined in section 2(b)), or
(C) $3,000 in any other case.
(3) Additional standard deduction for aged and
blind.--For purposes of paragraph (1), the additional
standard deduction is the sum of each additional amount
to which the taxpayer is entitled under subsection (f).
(4) Adjustments for inflation.--In the case of any
taxable year beginning in a calendar year after 1988,
each dollar amount contained in paragraph (2)(B),
(2)(C), or (5) or subsection (f) shall be increased by
an amount equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, by substituting
for ``calendar year 2016'' in subparagraph
(A)(ii) thereof--
(i) ``calendar year 1987'' in the
case of the dollar amounts contained in
paragraph (2)(B), (2)(C), or (5)(A) or
subsection (f), and
(ii) ``calendar year 1997'' in the
case of the dollar amount contained in
paragraph (5)(B).
(5) Limitation on basic standard deduction in the
case of certain dependents.--In the case of an
individual with respect to whom a deduction under
section 151 is allowable to another taxpayer for a
taxable year beginning in the calendar year in which
the individual's taxable year begins, the basic
standard deduction applicable to such individual for
such individual's taxable year shall not exceed the
greater of--
(A) $500, or
(B) the sum of $250 and such individual's
earned income.
(6) Certain individuals, etc., not eligible for
standard deduction.--In the case of--
(A) a married individual filing a separate
return where either spouse itemizes deductions,
(B) a nonresident alien individual,
(C) an individual making a return under
section 443(a)(1) for a period of less than 12
months on account of a change in his annual
accounting period, or
(D) an estate or trust, common trust fund, or
partnership,
the standard deduction shall be zero.
(7) Special rules for taxable years 2018 through
2025.--In the case of a taxable year beginning after
December 31, 2017, and before January 1, 2026--
(A) Increase in standard deduction.--
Paragraph (2) shall be applied--
(i) by substituting ``$18,000'' for
``$4,400'' in subparagraph (B), and
(ii) by substituting ``$12,000'' for
``$3,000'' in subparagraph (C).
(B) Adjustment for inflation.--
(i) In general.--Paragraph (4) shall
not apply to the dollar amounts
contained in paragraphs (2)(B) and
(2)(C).
(ii) Adjustment of increased
amounts.--In the case of a taxable year
beginning after 2018, the $18,000 and
$12,000 amounts in subparagraph (A)
shall each be increased by an amount
equal to--
(I) such dollar amount,
multiplied by
(II) the cost-of-living
adjustment determined under
section 1(f)(3) for the
calendar year in which the
taxable year begins, determined
by substituting ``2017'' for
``2016'' in subparagraph
(A)(ii) thereof.
If any increase under this clause is not a
multiple of $50, such increase shall be rounded
to the next lowest multiple of $50.
(d) Itemized deductions.--For purposes of this subtitle, the
term ``itemized deductions'' means the deductions allowable
under this chapter other than--
(1) the deductions allowable in arriving at adjusted
gross income,
(2) the deduction for personal exemptions provided by
section 151, and
(3) any deduction provided in section 199A.
(e) Election to itemize.--
(1) In general.--Unless an individual makes an
election under this subsection for the taxable year, no
itemized deduction shall be allowed for the taxable
year. For purposes of this subtitle, the determination
of whether a deduction is allowable under this chapter
shall be made without regard to the preceding sentence.
(2) Time and manner of election.--Any election under
this subsection shall be made on the taxpayer's return,
and the Secretary shall prescribe the manner of
signifying such election on the return.
(3) Change of election.--Under regulations prescribed
by the Secretary, a change of election with respect to
itemized deductions for any taxable year may be made
after the filing of the return for such year. If the
spouse of the taxpayer filed a separate return for any
taxable year corresponding to the taxable year of the
taxpayer, the change shall not be allowed unless, in
accordance with such regulations--
(A) the spouse makes a change of election
with respect to itemized deductions, for the
taxable year covered in such separate return,
consistent with the change of treatment sought
by the taxpayer, and
(B) the taxpayer and [his spouse] the
taxpayer's spouse consent in writing to the
assessment (within such period as may be agreed
on with the Secretary) of any deficiency, to
the extent attributable to such change of
election, even though at the time of the filing
of such consent the assessment of such
deficiency would otherwise be prevented by the
operation of any law or rule of law.
This paragraph shall not apply if the tax liability of
the taxpayer's spouse for the taxable year
corresponding to the taxable year of the taxpayer has
been compromised under section 7122.
(f) Aged or blind additional amounts.--
(1) Additional amounts for the aged.--The taxpayer
shall be entitled to an additional amount of $600--
(A) [for himself if he] for the taxpayer if
the taxpayer has attained age 65 before the
close of [his taxable year] the taxpayer's
taxable year , and
(B) for the spouse of the taxpayer if the
spouse has attained age 65 before the close of
the taxable year and an additional exemption is
allowable to the taxpayer for such spouse under
section 151(b).
(2) Additional amount for blind.--The taxpayer shall
be entitled to an additional amount of $600--
(A) [for himself if he] for the taxpayer if
the taxpayer is blind at the close of the
taxable year, and
(B) for the spouse of the taxpayer if the
spouse is blind as of the close of the taxable
year and an additional exemption is allowable
to the taxpayer for such spouse under section
151(b).
For purposes of subparagraph (B), if the spouse dies
during the taxable year the determination of whether
such spouse is blind shall be made as of the time of
such death.
(3) Higher amount for certain unmarried
individuals.--In the case of an individual who is not
married and is not a surviving spouse, paragraphs (1)
and (2) shall be applied by substituting ``$750'' for
``$600''.
(4) Blindness defined.--For purposes of this
subsection, an individual is blind only if [his] the
individual's central visual acuity does not exceed 20/
200 in the better eye with correcting lenses, or if
[his] the individual's visual acuity is greater than
20/200 but is accompanied by a limitation in the fields
of vision such that the widest diameter of the visual
field subtends an angle no greater than 20 degrees.
(g) Marital status.--For purposes of this section, marital
status shall be determined under section 7703.
* * * * * * *
PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME
* * * * * * *
SEC. 86. SOCIAL SECURITY AND TIER 1 RAILROAD RETIREMENT BENEFITS.
(a) In general.--
(1) In general.--Except as provided in paragraph (2),
gross income for the taxable year of any taxpayer
described in subsection (b) (notwithstanding section
207 of the Social Security Act) includes social
security benefits in an amount equal to the lesser of--
(A) one-half of the social security benefits
received during the taxable year, or
(B) one-half of the excess described in
subsection (b)(1).
(2) Additional amount.--In the case of a taxpayer
with respect to whom the amount determined under
subsection (b)(1)(A) exceeds the adjusted base amount,
the amount included in gross income under this section
shall be equal to the lesser of--
(A) the sum of--
(i) 85 percent of such excess, plus
(ii) the lesser of the amount
determined under paragraph (1) or an
amount equal to one-half of the
difference between the adjusted base
amount and the base amount of the
taxpayer, or
(B) 85 percent of the social security
benefits received during the taxable year.
(b) Taxpayers to whom subsection (a) applies.--
(1) In general.--A taxpayer is described in this
subsection if--
(A) the sum of--
(i) the modified adjusted gross
income of the taxpayer for the taxable
year, plus
(ii) one-half of the social security
benefits received during the taxable
year, exceeds
(B) the base amount.
(2) Modified adjusted gross income.--For purposes of
this subsection, the term ``modified adjusted gross
income'' means adjusted gross income--
(A) determined without regard to this section
and sections 135, 137, 221, 222, 911, 931, and
933, and
(B) increased by the amount of interest
received or accrued by the taxpayer during the
taxable year which is exempt from tax.
(c) Base amount and adjusted base amount.--For purposes of
this section--
(1) Base amount.--The term ``base amount'' means--
(A) except as otherwise provided in this
paragraph, $25,000,
(B) $32,000 in the case of a joint return,
and
(C) zero in the case of a taxpayer who--
(i) is married as of the close of the
taxable year (within the meaning of
section 7703) but does not file a joint
return for such year, and
(ii) does not live apart from [his
spouse] the taxpayer's spouse at all
times during the taxable year.
(2) Adjusted base amount.--The term ``adjusted base
amount'' means--
(A) except as otherwise provided in this
paragraph, $34,000,
(B) $44,000 in the case of a joint return,
and
(C) zero in the case of a taxpayer described
in paragraph (1)(C).
(d) Social security benefit.--
(1) In general.--For purposes of this section, the
term ``social security benefit'' means any amount
received by the taxpayer by reason of entitlement to--
(A) a monthly benefit under title II of the
Social Security Act, or
(B) a tier 1 railroad retirement benefit.
(2) Adjustment for repayments during year.--
(A) In general.--For purposes of this
section, the amount of social security benefits
received during any taxable year shall be
reduced by any repayment made by the taxpayer
during the taxable year of a social security
benefit previously received by the taxpayer
(whether or not such benefit was received
during the taxable year).
(B) Denial of deduction.--If (but for this
subparagraph) any portion of the repayments
referred to in subparagraph (A) would have been
allowable as a deduction for the taxable year
under section 165, such portion shall be
allowable as a deduction only to the extent it
exceeds the social security benefits received
by the taxpayer during the taxable year (and
not repaid during such taxable year).
(3) Workmen's compensation benefits substituted for
social security benefits.--For purposes of this
section, if, by reason of section 224 of the Social
Security Act (or by reason of section 3(a)(1) of the
Railroad Retirement Act of 1974), any social security
benefit is reduced by reason of the receipt of a
benefit under a workmen's compensation act, the term
``social security benefit'' includes that portion of
such benefit received under the workmen's compensation
act which equals such reduction.
(4) Tier 1 railroad retirement benefit.--For purposes
of paragraph (1), the term ``tier 1 railroad retirement
benefit'' means--
(A) the amount of the annuity under the
Railroad Retirement Act of 1974 equal to the
amount of the benefit to which the taxpayer
would have been entitled under the Social
Security Act if all of the service after
December 31, 1936, of the employee (on whose
employment record the annuity is being paid)
had been included in the term ``employment'' as
defined in the Social Security Act, and
(B) a monthly annuity amount under section
3(f)(3) of the Railroad Retirement Act of 1974.
(5) Effect of early delivery of benefit checks.--For
purposes of subsection (a), in any case where section
708 of the Social Security Act causes social security
benefit checks to be delivered before the end of the
calendar month for which they are issued, the benefits
involved shall be deemed to have been received in the
succeeding calendar month.
(e) Limitation on amount included where taxpayer receives
lump-sum payment.--
(1) Limitation.--If--
(A) any portion of a lump-sum payment of
social security benefits received during the
taxable year is attributable to prior taxable
years, and
(B) the taxpayer makes an election under this
subsection for the taxable year,
then the amount included in gross income under this
section for the taxable year by reason of the receipt
of such portion shall not exceed the sum of the
increases in gross income under this chapter for prior
taxable years which would result solely from taking
into account such portion in the taxable years to which
it is attributable.
(2) Special rules.--
(A) Year to which benefit attributable.--For
purposes of this subsection, a social security
benefit is attributable to a taxable year if
the generally applicable payment date for such
benefit occurred during such taxable year.
(B) Election.--An election under this
subsection shall be made at such time and in
such manner as the Secretary shall by
regulations prescribe. Such election, once
made, may be revoked only with the consent of
the Secretary.
(f) Treatment as pension or annuity for certain purposes.--
For purposes of--
(1) section 22(c)(3)(A) (relating to reduction for
amounts received as pension or annuity),
(2) section 32(c)(2) (defining earned income),
(3) section 219(f)(1) (defining compensation), and
(4) section 911(b)(1) (defining foreign earned
income),
any social security benefit shall be treated as an amount
received as a pension or annuity.
* * * * * * *
PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME
* * * * * * *
SEC. 105. AMOUNTS RECEIVED UNDER ACCIDENT AND HEALTH PLANS.
(a) Amounts attributable to employer contributions.--Except
as otherwise provided in this section, amounts received by an
employee through accident or health insurance for personal
injuries or sickness shall be included in gross income to the
extent such amounts (1) are attributable to contributions by
the employer which were not includible in the gross income of
the employee, or (2) are paid by the employer.
(b) Amounts expended for medical care.--Except in the case of
amounts attributable to (and not in excess of) deductions
allowed under section 213 (relating to medical, etc., expenses)
for any prior taxable year, gross income does not include
amounts referred to in subsection (a) if such amounts are paid,
directly or indirectly, to the taxpayer to reimburse the
taxpayer for expenses incurred [by him] for the medical care
(as defined in section 213(d)) of the taxpayer, [his spouse,
his dependents] the taxpayer's spouse, the taxpayer's
dependents (as defined in section 152, determined without
regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof),
and any child (as defined in section 152(f)(1)) of the taxpayer
who as of the end of the taxable year has not attained age 27.
Any child to whom section 152(e) applies shall be treated as a
dependent of both parents for purposes of this subsection.
(c) Payments unrelated to absence from work.--Gross income
does not include amounts referred to in subsection (a) to the
extent such amounts--
(1) constitute payment for the permanent loss or loss
of use of a member or function of the body, or the
permanent disfigurement, of the taxpayer, [his spouse]
the taxpayer's spouse , or a dependent (as defined in
section 152, determined without regard to subsections
(b)(1), (b)(2), and (d)(1)(B) thereof), and
(2) are computed with reference to the nature of the
injury without regard to the period the employee is
absent from work.
(e) Accident and health plans.--For purposes of this section
and section 104--
(1) amounts received under an accident or health plan
for employees, and
(2) amounts received from a sickness and disability
fund for employees maintained under the law of a State
or the District of Columbia,
shall be treated as amounts received through accident or health
insurance.
(f) Rules for application of section 213.--For purposes of
section 213(a) (relating to medical, dental, etc., expenses)
amounts excluded from gross income under subsection (c) shall
not be considered as compensation (by insurance or otherwise)
for expenses paid for medical care.
(g) Self-employed individual not considered an employee.--For
purposes of this section, the term ``employee'' does not
include an individual who is an employee within the meaning of
section 401(c)(1) (relating to self-employed individuals).
(h) Amount paid to highly compensated individuals under a
discriminatory self-insured medical expense reimbursement
plan.--
(1) In general.--In the case of amounts paid to a
highly compensated individual under a self-insured
medical reimbursement plan which does not satisfy the
requirements of paragraph (2) for a plan year,
subsection (b) shall not apply to such amounts to the
extent they constitute an excess reimbursement of such
highly compensated individual.
(2) Prohibition of discrimination.--A self-insured
medical reimbursement plan satisfies the requirements
of this paragraph only if--
(A) the plan does not discriminate in favor
of highly compensated individuals as to
eligibility to participate; and
(B) the benefits provided under the plan do
not discriminate in favor of participants who
are highly compensated individuals.
(3) Nondiscriminatory eligibility classifications.--
(A) In general.--A self-insured medical
reimbursement plan does not satisfy the
requirements of subparagraph (A) of paragraph
(2) unless such plan benefits--
(i) 70 percent or more of all
employees, or 80 percent or more of all
the employees who are eligible to
benefit under the plan if 70 percent or
more of all employees are eligible to
benefit under the plan; or
(ii) such employees as qualify under
a classification set up by the employer
and found by the Secretary not to be
discriminatory in favor of highly
compensated individuals.
(B) Exclusion of certain employees.--For
purposes of subparagraph (A), there may be
excluded from consideration--
(i) employees who have not completed
3 years of service;
(ii) employees who have not attained
age 25;
(iii) part-time or seasonal
employees;
(iv) employees not included in the
plan who are included in a unit of
employees covered by an agreement
between employee representatives and
one or more employers which the
Secretary finds to be a collective
bargaining agreement, if accident and
health benefits were the subject of
good faith bargaining between such
employee representatives and such
employer or employers; and
(v) employees who are nonresident
aliens and who receive no earned income
(within the meaning of section
911(d)(2)) from the employer which
constitutes income from sources within
the United States (within the meaning
of section 861(a)(3)).
(4) Nondiscriminatory benefits.--A self-insured
medical reimbursement plan does not meet the
requirements of subparagraph (B) of paragraph (2)
unless all benefits provided for participants who are
highly compensated individuals are provided for all
other participants.
(5) Highly compensated individual defined.--For
purposes of this subsection, the term ``highly
compensated individual'' means an individual who is--
(A) one of the 5 highest paid officers,
(B) a shareholder who owns (with the
application of section 318) more than 10
percent in value of the stock of the employer,
or
(C) among the highest paid 25 percent of all
employees (other than employees described in
paragraph (3)(B) who are not participants).
(6) Self-insured medical reimbursement plan.--The
term ``self-insured medical reimbursement plan'' means
a plan of an employer to reimburse employees for
expenses referred to in subsection (b) for which
reimbursement is not provided under a policy of
accident and health insurance.
(7) Excess reimbursement of highly compensated
individual.--For purposes of this section, the excess
reimbursement of a highly compensated individual which
is attributable to a self-insured medical reimbursement
plan is--
(A) in the case of a benefit available to
highly compensated individuals but not to all
other participants (or which otherwise fails to
satisfy the requirements of paragraph (2)(B)),
the amount reimbursed under the plan to the
employee with respect to such benefit, and
(B) in the case of benefits (other than
benefits described in subparagraph (A)) paid to
a highly compensated individual by a plan which
fails to satisfy the requirements of paragraph
(2), the total amount reimbursed to the highly
compensated individual for the plan year
multiplied by a fraction--
(i) the numerator of which is the
total amount reimbursed to all
participants who are highly compensated
individuals under the plan for the plan
year, and
(ii) the denominator of which is the
total amount reimbursed to all
employees under the plan for such plan
year.
In determining the fraction under subparagraph (B),
there shall not be taken into account any reimbursement
which is attributable to a benefit described in
subparagraph (A).
(8) Certain controlled groups, etc..--All employees
who are treated as employed by a single employer under
subsection (b), (c), or (m) of section 414 shall be
treated as employed by a single employer for purposes
of this section.
(9) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the
provisions of this section.
(10) Time of inclusion.--Any amount paid for a plan
year that is included in income by reason of this
subsection shall be treated as received or accrued in
the taxable year of the participant in which the plan
year ends.
(i) Sick pay under Railroad Unemployment Insurance Act.--
Notwithstanding any other provision of law, gross income
includes benefits paid under section 2(a) of the Railroad
Unemployment Insurance Act for days of sickness; except to the
extent such sickness (as determined in accordance with
standards prescribed by the Railroad Retirement Board) is the
result of on-the-job injury.
(j) Special rule for certain governmental plans.--
(1) In general.--For purposes of subsection (b),
amounts paid (directly or indirectly) to a qualified
taxpayer from an accident or health plan described in
paragraph (2) shall not fail to be excluded from gross
income solely because such plan, on or before January
1, 2008, provides for reimbursements of health care
expenses of a deceased employee's beneficiary (other
than an individual described in paragraph (3)(B)).
(2) Plan described.--An accident or health plan is
described in this paragraph if such plan is funded by a
medical trust that is established in connection with a
public retirement system or established by or on behalf
of a State or political subdivision thereof and that--
(A) has been authorized by a State
legislature, or
(B) has received a favorable ruling from the
Internal Revenue Service that the trust's
income is not includible in gross income under
section 115 or 501(c)(9).
(3) Qualified taxpayer.--For purposes of paragraph
(1), with respect to an accident or health plan
described in paragraph (2), the term ``qualified
taxpayer'' means a taxpayer who is--
(A) an employee, or
(B) the spouse, dependent (as defined for
purposes of subsection (b)), or child (as
defined for purposes of such subsection) of an
employee.
* * * * * * *
SEC. 119. MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF THE
EMPLOYER.
(a) Meals and Lodging Furnished to Employee[, His Spouse, and
His Dependents] and the Employee's Spouse and Dependents,
Pursuant to Employment.--There shall be excluded from gross
income of an employee the value of any meals or lodging
furnished to [him, his spouse, or any of his dependents by or
on behalf of his employer] the employee or the employee's
spouse or dependents by or on behalf of the employer of the
employee for the convenience of the employer, but only if--
(1) in the case of meals, the meals are furnished on
the business premises of the employer, or
(2) in the case of lodging, the employee is required
to accept such lodging on the business premises of
[his] the employee's employer as a condition of [his]
the employee's employment.
(b) Special rules.--For purposes of subsection (a)--
(1) Provisions of employment contract or State
statute not to be determinative.--In determining
whether meals or lodging are furnished for the
convenience of the employer, the provisions of an
employment contract or of a State statute fixing terms
of employment shall not be determinative of whether the
meals or lodging are intended as compensation.
(2) Certain factors not taken into account with
respect to meals.--In determining whether meals are
furnished for the convenience of the employer, the fact
that a charge is made for such meals, and the fact that
the employee may accept or decline such meals, shall
not be taken into account.
(3) Certain fixed charges for meals.--
(A) In general.--If--
(i) an employee is required to pay on
a periodic basis a fixed charge for his
meals, and
(ii) such meals are furnished by the
employer for the convenience of the
employer,
there shall be excluded from the employee's
gross income an amount equal to such fixed
charge.
(B) Application of subparagraph (A).--
Subparagraph (A) shall apply--
(i) whether the employee pays the
fixed charge out of his stated
compensation or out of his own funds,
and
(ii) only if the employee is required
to make the payment whether he accepts
or declines the meals.
(4) Meals furnished to employees on business premises
where meals of most employees are otherwise
excludable.--All meals furnished on the business
premises of an employer to such employer's employees
shall be treated as furnished for the convenience of
the employer if, without regard to this paragraph, more
than half of the employees to whom such meals are
furnished on such premises are furnished such meals for
the convenience of the employer.
(c) Employees living in certain camps.--
(1) In general.--In the case of an individual who is
furnished lodging in a camp located in a foreign
country by or on behalf of his employer, such camp
shall be considered to be part of the business premises
of the employer.
(2) Camp.--For purposes of this section, a camp
constitutes lodging which is--
(A) provided by or on behalf of the employer
for the convenience of the employer because the
place at which such individual renders services
is in a remote area where satisfactory housing
is not available on the open market,
(B) located, as near as practicable, in the
vicinity of the place at which such individual
renders services, and
(C) furnished in a common area (or enclave)
which is not available to the public and which
normally accommodates 10 or more employees.
(d) Lodging furnished by certain educational institutions to
employees.--
(1) In general.--In the case of an employee of an
educational institution, gross income shall not include
the value of qualified campus lodging furnished to such
employee during the taxable year.
(2) Exception in cases of inadequate rent.--Paragraph
(1) shall not apply to the extent of the excess of--
(A) the lesser of--
(i) 5 percent of the appraised value
of the qualified campus lodging, or
(ii) the average of the rentals paid
by individuals (other than employees or
students of the educational
institution) during such calendar year
for lodging provided by the educational
institution which is comparable to the
qualified campus lodging provided to
the employee, over
(B) the rent paid by the employee for the
qualified campus lodging during such calendar
year.
The appraised value under subparagraph (A)(i) shall be
determined as of the close of the calendar year in
which the taxable year begins, or, in the case of a
rental period not greater than 1 year, at any time
during the calendar year in which such period begins.
(3) Qualified campus lodging.--For purposes of this
subsection, the term ``qualified campus lodging'' means
lodging to which subsection (a) does not apply and
which is--
(A) located on, or in the proximity of, a
campus of the educational institution, and
(B) furnished to the employee, [his spouse,
and any of his dependents] the employee's
spouse, and any of the employee's dependents by
or on behalf of such institution for use as a
residence.
(4) Educational institution, etc..--For purposes of
this subsection--
(A) In general.--The term ``educational
institution'' means--
(i) an institution described in
section 170(b)(1)(A)(ii) (or an entity
organized under State law and composed
of public institutions so described),
or
(ii) an academic health center.
(B) Academic health center.--For purposes of
subparagraph (A), the term ``academic health
center'' means an entity--
(i) which is described in section
170(b)(1)(A)(iii),
(ii) which receives (during the
calendar year in which the taxable year
of the taxpayer begins) payments under
subsection (d)(5)(B) or (h) of section
1886 of the Social Security Act
(relating to graduate medical
education), and
(iii) which has as one of its
principal purposes or functions the
providing and teaching of basic and
clinical medical science and research
with the entity's own faculty.
* * * * * * *
SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.
(a) Exclusion.--Gross income shall not include gain from the
sale or exchange of property if, during the 5-year period
ending on the date of the sale or exchange, such property has
been owned and used by the taxpayer as the taxpayer's principal
residence for periods aggregating 2 years or more.
(b) Limitations.--
(1) In general.--The amount of gain excluded from
gross income under subsection (a) with respect to any
sale or exchange shall not exceed $250,000.
(2) Special rules for joint returns.--In the case of
a [husband and wife who make] married couple who makes
a joint return for the taxable year of the sale or
exchange of the property--
(A) $500,000 Limitation for certain joint
returns.--Paragraph (1) shall be applied by
substituting ``$500,000'' for ``$250,000'' if--
(i) either spouse meets the ownership
requirements of subsection (a) with
respect to such property;
(ii) both spouses meet the use
requirements of subsection (a) with
respect to such property; and
(iii) neither spouse is ineligible
for the benefits of subsection (a) with
respect to such property by reason of
paragraph (3).
(B) Other joint returns.--If such spouses do
not meet the requirements of subparagraph (A),
the limitation under paragraph (1) shall be the
sum of the limitations under paragraph (1) to
which each spouse would be entitled if such
spouses had not been married. For purposes of
the preceding sentence, each spouse shall be
treated as owning the property during the
period that either spouse owned the property.
(3) Application to only 1 sale or exchange every 2
years.--Subsection (a) shall not apply to any sale or
exchange by the taxpayer if, during the 2-year period
ending on the date of such sale or exchange, there was
any other sale or exchange by the taxpayer to which
subsection (a) applied.
(4) Special rule for certain sales by surviving
spouses.--In the case of a sale or exchange of property
by an unmarried individual whose spouse is deceased on
the date of such sale, paragraph (1) shall be applied
by substituting ``$500,000'' for ``$250,000'' if such
sale occurs not later than 2 years after the date of
death of such spouse and the requirements of paragraph
(2)(A) were met immediately before such date of death.
(5) Exclusion of gain allocated to nonqualified
use.--
(A) In general.--Subsection (a) shall not
apply to so much of the gain from the sale or
exchange of property as is allocated to periods
of nonqualified use.
(B) Gain allocated to periods of nonqualified
use.--For purposes of subparagraph (A), gain
shall be allocated to periods of nonqualified
use based on the ratio which--
(i) the aggregate periods of
nonqualified use during the period such
property was owned by the taxpayer,
bears to
(ii) the period such property was
owned by the taxpayer.
(C) Period of nonqualified use.--For purposes
of this paragraph--
(i) In general.--The term ``period of
nonqualified use'' means any period
(other than the portion of any period
preceding January 1, 2009) during which
the property is not used as the
principal residence of the taxpayer or
the taxpayer's spouse or former spouse.
(ii) Exceptions.--The term ``period
of nonqualified use'' does not
include--
(I) any portion of the 5-year
period described in subsection
(a) which is after the last
date that such property is used
as the principal residence of
the taxpayer or the taxpayer's
spouse,
(II) any period (not to
exceed an aggregate period of
10 years) during which the
taxpayer or the taxpayer's
spouse is serving on qualified
official extended duty (as
defined in subsection
(d)(9)(C)) described in clause
(i), (ii), or (iii) of
subsection (d)(9)(A), and
(III) any other period of
temporary absence (not to
exceed an aggregate period of 2
years) due to change of
employment, health conditions,
or such other unforeseen
circumstances as may be
specified by the Secretary.
(D) Coordination with recognition of gain
attributable to depreciation.--For purposes of
this paragraph--
(i) subparagraph (A) shall be applied
after the application of subsection
(d)(6), and
(ii) subparagraph (B) shall be
applied without regard to any gain to
which subsection (d)(6) applies.
(c) Exclusion for taxpayers failing to meet certain
requirements.--
(1) In general.--In the case of a sale or exchange to
which this subsection applies, the ownership and use
requirements of subsection (a), and subsection (b)(3),
shall not apply; but the dollar limitation under
paragraph (1) or (2) of subsection (b), whichever is
applicable, shall be equal to--
(A) the amount which bears the same ratio to
such limitation (determined without regard to
this paragraph) as
(B)(i) the shorter of--
(I) the aggregate periods, during the
5-year period ending on the date of
such sale or exchange, such property
has been owned and used by the taxpayer
as the taxpayer's principal residence;
or
(II) the period after the date of the
most recent prior sale or exchange by
the taxpayer to which subsection (a)
applied and before the date of such
sale or exchange, bears to
(ii) 2 years.
(2) Sales and exchanges to which subsection
applies.--This subsection shall apply to any sale or
exchange if--
(A) subsection (a) would not (but for this
subsection) apply to such sale or exchange by
reason of--
(i) a failure to meet the ownership
and use requirements of subsection (a),
or
(ii) subsection (b)(3), and
(B) such sale or exchange is by reason of a
change in place of employment, health, or, to
the extent provided in regulations, unforeseen
circumstances.
(d) Special rules.--
(1) Joint returns.--If a [husband and wife make]
married couple makes a joint return for the taxable
year of the sale or exchange of the property,
subsections (a) and (c) shall apply if either spouse
meets the ownership and use requirements of subsection
(a) with respect to such property.
(2) Property of deceased spouse.--For purposes of
this section, in the case of an unmarried individual
whose spouse is deceased on the date of the sale or
exchange of property, the period such unmarried
individual owned and used such property shall include
the period such deceased spouse owned and used such
property before death.
(3) Property owned by spouse or former spouse.--For
purposes of this section--
(A) Property transferred to individual from
spouse or former spouse.--In the case of an
individual holding property transferred to such
individual in a transaction described in
section 1041(a), the period such individual
owns such property shall include the period the
transferor owned the property.
(B) Property used by former spouse pursuant
to divorce decree, etc..--Solely for purposes
of this section, an individual shall be treated
as using property as such individual's
principal residence during any period of
ownership while such individual's spouse or
former spouse is granted use of the property
under a divorce or separation instrument.
(C) Divorce or separation instrument.--For
purposes of this paragraph, the term ``divorce
or separation instrument'' means--
(i) a decree of divorce or separate
maintenance or a written instrument
incident to such a decree,
(ii) a written separation agreement,
or
(iii) a decree (not described in
clause (i)) requiring a spouse to make
payments for the support or maintenance
of the other spouse.
(4) Tenant-stockholder in cooperative housing
corporation.--For purposes of this section, if the
taxpayer holds stock as a tenant-stockholder (as
defined in section 216) in a cooperative housing
corporation (as defined in such section), then--
(A) the holding requirements of subsection
(a) shall be applied to the holding of such
stock, and
(B) the use requirements of subsection (a)
shall be applied to the house or apartment
which the taxpayer was entitled to occupy as
such stockholder.
(5) Involuntary conversions.--
(A) In general.--For purposes of this
section, the destruction, theft, seizure,
requisition, or condemnation of property shall
be treated as the sale of such property.
(B) Application of section 1033.--In applying
section 1033 (relating to involuntary
conversions), the amount realized from the sale
or exchange of property shall be treated as
being the amount determined without regard to
this section, reduced by the amount of gain not
included in gross income pursuant to this
section.
(C) Property acquired after involuntary
conversion.--If the basis of the property sold
or exchanged is determined (in whole or in
part) under section 1033(b) (relating to basis
of property acquired through involuntary
conversion), then the holding and use by the
taxpayer of the converted property shall be
treated as holding and use by the taxpayer of
the property sold or exchanged.
(6) Recognition of gain attributable to
depreciation.--Subsection (a) shall not apply to so
much of the gain from the sale of any property as does
not exceed the portion of the depreciation adjustments
(as defined in section 1250(b)(3)) attributable to
periods after May 6, 1997, in respect of such property.
(7) Determination of use during periods of out-of-
residence care.--In the case of a taxpayer who--
(A) becomes physically or mentally incapable
of self-care, and
(B) owns property and uses such property as
the taxpayer's principal residence during the
5-year period described in subsection (a) for
periods aggregating at least 1 year,
then the taxpayer shall be treated as using such
property as the taxpayer's principal residence during
any time during such 5-year period in which the
taxpayer owns the property and resides in any facility
(including a nursing home) licensed by a State or
political subdivision to care for an individual in the
taxpayer's condition.
(8) Sales of remainder interests.--For purposes of
this section--
(A) In general.--At the election of the
taxpayer, this section shall not fail to apply
to the sale or exchange of an interest in a
principal residence by reason of such interest
being a remainder interest in such residence,
but this section shall not apply to any other
interest in such residence which is sold or
exchanged separately.
(B) Exception for sales to related parties.--
Subparagraph (A) shall not apply to any sale
to, or exchange with, any person who bears a
relationship to the taxpayer which is described
in section 267(b) or 707(b).
(9) Uniformed services, Foreign Service, and
intelligence community.--
(A) In general.--At the election of an
individual with respect to a property, the
running of the 5-year period described in
subsections (a) and (c)(1)(B) and paragraph (7)
of this subsection with respect to such
property shall be suspended during any period
that such individual or such individual's
spouse is serving on qualified official
extended duty--
(i) as a member of the uniformed
services,
(ii) as a member of the Foreign
Service of the United States, or
(iii) as an employee of the
intelligence community.
(B) Maximum period of suspension.--The 5-year
period described in subsection (a) shall not be
extended more than 10 years by reason of
subparagraph (A).
(C) Qualified official extended duty.--For
purposes of this paragraph--
(i) In general.--The term ``qualified
official extended duty'' means any
extended duty while serving at a duty
station which is at least 50 miles from
such property or while residing under
Government orders in Government
quarters.
(ii) Uniformed services.--The term
``uniformed services'' has the meaning
given such term by section 101(a)(5) of
title 10, United States Code, as in
effect on the date of the enactment of
this paragraph.
(iii) Foreign Service of the United
States.--The term ``member of the
Foreign Service of the United States''
has the meaning given the term ``member
of the Service'' by paragraph (1), (2),
(3), (4), or (5) of section 103 of the
Foreign Service Act of 1980, as in
effect on the date of the enactment of
this paragraph.
(iv) Employee of intelligence
community.--The term ``employee of the
intelligence community'' means an
employee (as defined by section 2105 of
title 5, United States Code) of--
(I) the Office of the
Director of National
Intelligence,
(II) the Central Intelligence
Agency,
(III) the National Security
Agency,
(IV) the Defense Intelligence
Agency,
(V) the National Geospatial-
Intelligence Agency,
(VI) the National
Reconnaissance Office,
(VII) any other office within
the Department of Defense for
the collection of specialized
national intelligence through
reconnaissance programs,
(VIII) any of the
intelligence elements of the
Army, the Navy, the Air Force,
the Marine Corps, the Federal
Bureau of Investigation, the
Department of Treasury, the
Department of Energy, and the
Coast Guard,
(IX) the Bureau of
Intelligence and Research of
the Department of State, or
(X) any of the elements of
the Department of Homeland
Security concerned with the
analyses of foreign
intelligence information.
(v) Extended duty.--The term
``extended duty'' means any period of
active duty pursuant to a call or order
to such duty for a period in excess of
90 days or for an indefinite period.
(D) Special rules relating to election.--
(i) Election limited to 1 property at
a time.--An election under subparagraph
(A) with respect to any property may
not be made if such an election is in
effect with respect to any other
property.
(ii) Revocation of election.--An
election under subparagraph (A) may be
revoked at any time.
(10) Property acquired in like-kind exchange.--If a
taxpayer acquires property in an exchange with respect
to which gain is not recognized (in whole or in part)
to the taxpayer under subsection (a) or (b) of section
1031, subsection (a) shall not apply to the sale or
exchange of such property by such taxpayer (or by any
person whose basis in such property is determined, in
whole or in part, by reference to the basis in the
hands of such taxpayer) during the 5-year period
beginning with the date of such acquisition.
(12) Peace Corps.--
(A) In general.--At the election of an
individual with respect to a property, the
running of the 5-year period described in
subsections (a) and (c)(1)(B) and paragraph (7)
of this subsection with respect to such
property shall be suspended during any period
that such individual or such individual's
spouse is serving outside the United States--
(i) on qualified official extended
duty (as defined in paragraph (9)(C))
as an employee of the Peace Corps, or
(ii) as an enrolled volunteer or
volunteer leader under section 5 or 6
(as the case may be) of the Peace Corps
Act (22 U.S.C. 2504, 2505).
(B) Applicable rules.--For purposes of
subparagraph (A), rules similar to the rules of
subparagraphs (B) and (D) of paragraph (9)
shall apply.
(e) Denial of exclusion for expatriates.--This section shall
not apply to any sale or exchange by an individual if the
treatment provided by section 877(a)(1) applies to such
individual.
(f) Election to have section not apply.--This section shall
not apply to any sale or exchange with respect to which the
taxpayer elects not to have this section apply.
(g) Residences acquired in rollovers under section 1034.--For
purposes of this section, in the case of property the
acquisition of which by the taxpayer resulted under section
1034 (as in effect on the day before the date of the enactment
of this section) in the nonrecognition of any part of the gain
realized on the sale or exchange of another residence, in
determining the period for which the taxpayer has owned and
used such property as the taxpayer's principal residence, there
shall be included the aggregate periods for which such other
residence (and each prior residence taken into account under
section 1223(6) in determining the holding period of such
property) had been so owned and used.
* * * * * * *
SEC. 129. DEPENDENT CARE ASSISTANCE PROGRAMS.
(a) Exclusion.--
(1) In general.--Gross income of an employee does not
include amounts paid or incurred by the employer for
dependent care assistance provided to such employee if
the assistance is furnished pursuant to a program which
is described in subsection (d).
(2) Limitation of exclusion.--
(A) In general.--The amount which may be
excluded under paragraph (1) for dependent care
assistance with respect to dependent care
services provided during a taxable year shall
not exceed $5,000 ($2,500 in the case of a
separate return by a married individual).
(B) Year of inclusion.--The amount of any
excess under subparagraph (A) shall be included
in gross income in the taxable year in which
the dependent care services were provided (even
if payment of dependent care assistance for
such services occurs in a subsequent taxable
year).
(C) Marital status.--For purposes of this
paragraph, marital status shall be determined
under the rules of paragraphs (3) and (4) of
section 21(e).
(b) Earned income limitation.--
(1) In general.--The amount excluded from the income
of an employee under subsection (a) for any taxable
year shall not exceed--
(A) in the case of an employee who is not
married at the close of such taxable year, the
earned income of such employee for such taxable
year, or
(B) in the case of an employee who is married
at the close of such taxable year, the lesser
of--
(i) the earned income of such
employee for such taxable year, or
(ii) the earned income of the spouse
of such employee for such taxable year.
(2) Special rule for certain spouses.--For purposes
of paragraph (1), the provisions of section 21(d)(2)
shall apply in determining the earned income of a
spouse who is a student or incapable of caring for
[himself] the spouse's self .
(c) Payments to related individuals.--No amount paid or
incurred during the taxable year of an employee by an employer
in providing dependent care assistance to such employee shall
be excluded under subsection (a) if such amount was paid or
incurred to an individual--
(1) with respect to whom, for such taxable year, a
deduction is allowable under section 151(c) (relating
to personal exemptions for dependents) to such employee
or the spouse of such employee, or
(2) who is a child of such employee (within the
meaning of section 152(f)(1)) under the age of 19 at
the close of such taxable year.
(d) Dependent care assistance program.--
(1) In general.--For purposes of this section a
dependent care assistance program is a separate written
plan of an employer for the exclusive benefit of his
employees to provide such employees with dependent care
assistance which meets the requirements of paragraphs
(2) through (8) of this subsection. If any plan would
qualify as a dependent care assistance program but for
a failure to meet the requirements of this subsection,
then, notwithstanding such failure, such plan shall be
treated as a dependent care assistance program in the
case of employees who are not highly compensated
employees.
(2) Discrimination.--The contributions or benefits
provided under the plan shall not discriminate in favor
of employees who are highly compensated employees
(within the meaning of section 414(q)) or their
dependents.
(3) Eligibility.--The program shall benefit employees
who qualify under a classification set up by the
employer and found by the Secretary not to be
discriminatory in favor of employees described in
paragraph (2), or their dependents.
(4) Principal shareholders or owners.--Not more than
25 percent of the amounts paid or incurred by the
employer for dependent care assistance during the year
may be provided for the class of individuals who are
shareholders or owners (or their spouses or
dependents), each of whom (on any day of the year) owns
more than 5 percent of the stock or of the capital or
profits interest in the employer.
(5) No funding required.--A program referred to in
paragraph (1) is not required to be funded.
(6) Notification of eligible employees.--Reasonable
notification of the availability and terms of the
program shall be provided to eligible employees.
(7) Statement of expenses.--The plan shall furnish to
an employee, on or before January 31, a written
statement showing the amounts paid or expenses incurred
by the employer in providing dependent care assistance
to such employee during the previous calendar year.
(8) Benefits.--
(A) In general.--A plan meets the
requirements of this paragraph if the average
benefits provided to employees who are not
highly compensated employees under all plans of
the employer is at least 55 percent of the
average benefits provided to highly compensated
employees under all plans of the employer.
(B) Salary reduction agreements.--For
purposes of subparagraph (A), in the case of
any benefits provided through a salary
reduction agreement, a plan may disregard any
employees whose compensation is less than
$25,000. For purposes of this subparagraph, the
term ``compensation'' has the meaning given
such term by section 414(q)(4), except that,
under rules prescribed by the Secretary, an
employer may elect to determine compensation on
any other basis which does not discriminate in
favor of highly compensated employees.
(9) Excluded employees.--For purposes of paragraphs
(3) and (8), there shall be excluded from
consideration--
(A) subject to rules similar to the rules of
section 410(b)(4), employees who have not
attained the age of 21 and completed 1 year of
service (as defined in section 410(a)(3)), and
(B) employees not included in a dependent
care assistance program who are included in a
unit of employees covered by an agreement which
the Secretary finds to be a collective
bargaining agreement between employee
representatives and 1 or more employees, if
there is evidence that dependent care benefits
were the subject of good faith bargaining
between such employee representatives and such
employer or employers.
(e) Definitions and special rules.--For purposes of this
section--
(1) Dependent care assistance.--The term ``dependent
care assistance'' means the payment of, or provision
of, those services which if paid for by the employee
would be considered employment-related expenses under
section 21(b)(2) (relating to expenses for household
and dependent care services necessary for gainful
employment).
(2) Earned income.--The term ``earned income'' shall
have the meaning given such term in section 32(c)(2),
but such term shall not include any amounts paid or
incurred by an employer for dependent care assistance
to an employee.
(3) Employee.--The term ``employee'' includes, for
any year, an individual who is an employee within the
meaning of section 401(c)(1) (relating to self-employed
individuals).
(4) Employer.--An individual who owns the entire
interest in an unincorporated trade or business shall
be treated as his own employer. A partnership shall be
treated as the employer of each partner who is an
employee within the meaning of paragraph (3).
(5) Attribution rules.--
(A) Ownership of stock.--Ownership of stock
in a corporation shall be determined in
accordance with the rules provided under
subsections (d) and (e) of section 1563
(without regard to section 1563(e)(3)(C)).
(B) Interest in unincorporated trade or
business.--The interest of an employee in a
trade or business which is not incorporated
shall be determined in accordance with
regulations prescribed by the Secretary, which
shall be based on principles similar to the
principles which apply in the case of
subparagraph (A).
(6) Utilization test not applicable.--A dependent
care assistance program shall not be held or considered
to fail to meet any requirements of subsection (d)
(other than paragraphs (4) and (8) thereof) merely
because of utilization rates for the different types of
assistance made available under the program.
(7) Disallowance of excluded amounts as credit or
deduction.--No deduction or credit shall be allowed to
the employee under any other section of this chapter
for any amount excluded from the gross income of the
employee by reason of this section.
(8) Treatment of onsite facilities.--In the case of
an onsite facility maintained by an employer, except to
the extent provided in regulations, the amount of
dependent care assistance provided to an employee
excluded with respect to any dependent shall be based
on--
(A) utilization of the facility by a
dependent of the employee, and
(B) the value of the services provided with
respect to such dependent.
(9) Identifying information required with respect to
service provider.--No amount paid or incurred by an
employer for dependent care assistance provided to an
employee shall be excluded from the gross income of
such employee unless--
(A) the name, address, and taxpayer
identification number of the person performing
the services are included on the return to
which the exclusion relates, or
(B) if such person is an organization
described in section 501(c)(3) and exempt from
tax under section 501(a), the name and address
of such person are included on the return to
which the exclusion relates.
In the case of a failure to provide the information
required under the preceding sentence, the preceding
sentence shall not apply if it is shown that the
taxpayer exercised due diligence in attempting to
provide the information so required.
* * * * * * *
SEC. 132. CERTAIN FRINGE BENEFITS.
(a) Exclusion from gross income.--Gross income shall not
include any fringe benefit which qualifies as a--
(1) no-additional-cost service,
(2) qualified employee discount,
(3) working condition fringe,
(4) de minimis fringe,
(5) qualified transportation fringe,
(6) qualified moving expense reimbursement,
(7) qualified retirement planning services, or
(8) qualified military base realignment and closure
fringe.
(b) No-additional-cost service defined.--For purposes of this
section, the term ``no-additional-cost service'' means any
service provided by an employer to an employee for use by such
employee if--
(1) such service is offered for sale to customers in
the ordinary course of the line of business of the
employer in which the employee is performing services,
and
(2) the employer incurs no substantial additional
cost (including forgone revenue) in providing such
service to the employee (determined without regard to
any amount paid by the employee for such service).
(c) Qualified employee discount defined.--For purposes of
this section--
(1) Qualified employee discount.--The term
``qualified employee discount'' means any employee
discount with respect to qualified property or services
to the extent such discount does not exceed--
(A) in the case of property, the gross profit
percentage of the price at which the property
is being offered by the employer to customers,
or
(B) in the case of services, 20 percent of
the price at which the services are being
offered by the employer to customers.
(2) Gross profit percentage.--
(A) In general.--The term ``gross profit
percentage'' means the percent which--
(i) the excess of the aggregate sales
price of property sold by the employer
to customers over the aggregate cost of
such property to the employer, is of
(ii) the aggregate sale price of such
property.
(B) Determination of gross profit
percentage.--Gross profit percentage shall be
determined on the basis of--
(i) all property offered to customers
in the ordinary course of the line of
business of the employer in which the
employee is performing services (or a
reasonable classification of property
selected by the employer), and
(ii) the employer's experience during
a representative period.
(3) Employee discount defined.--The term ``employee
discount'' means the amount by which--
(A) the price at which the property or
services are provided by the employer to an
employee for use by such employee, is less than
(B) the price at which such property or
services are being offered by the employer to
customers.
(4) Qualified property or services.--The term
``qualified property or services'' means any property
(other than real property and other than personal
property of a kind held for investment) or services
which are offered for sale to customers in the ordinary
course of the line of business of the employer in which
the employee is performing services.
(d) Working condition fringe defined.--For purposes of this
section, the term ``working condition fringe'' means any
property or services provided to an employee of the employer to
the extent that, if the employee paid for such property or
services, such payment would be allowable as a deduction under
section 162 or 167.
(e) De minimis fringe defined.--For purposes of this
section--
(1) In general.--The term ``de minimis fringe'' means
any property or service the value of which is (after
taking into account the frequency with which similar
fringes are provided by the employer to the employer's
employees) so small as to make accounting for it
unreasonable or administratively impracticable.
(2) Treatment of certain eating facilities.--The
operation by an employer of any eating facility for
employees shall be treated as a de minimis fringe if--
(A) such facility is located on or near the
business premises of the employer, and
(B) revenue derived from such facility
normally equals or exceeds the direct operating
costs of such facility.
The preceding sentence shall apply with respect to any
highly compensated employee only if access to the
facility is available on substantially the same terms
to each member of a group of employees which is defined
under a reasonable classification set up by the
employer which does not discriminate in favor of highly
compensated employees. For purposes of subparagraph
(B), an employee entitled under section 119 to exclude
the value of a meal provided at such facility shall be
treated as having paid an amount for such meal equal to
the direct operating costs of the facility attributable
to such meal.
(f) Qualified transportation fringe.--
(1) In general.--For purposes of this section, the
term ``qualified transportation fringe'' means any of
the following provided by an employer to an employee:
(A) Transportation in a commuter highway
vehicle if such transportation is in connection
with travel between the employee's residence
and place of employment.
(B) Any transit pass.
(C) Qualified parking.
(D) Any qualified bicycle commuting
reimbursement.
(2) Limitation on exclusion.--The amount of the
fringe benefits which are provided by an employer to
any employee and which may be excluded from gross
income under subsection (a)(5) shall not exceed--
(A) $175 per month in the case of the
aggregate of the benefits described in
subparagraphs (A) and (B) of paragraph (1),
(B) $175 per month in the case of qualified
parking, and
(C) the applicable annual limitation in the
case of any qualified bicycle commuting
reimbursement.
(3) Cash reimbursements.--For purposes of this
subsection, the term ``qualified transportation
fringe'' includes a cash reimbursement by an employer
to an employee for a benefit described in paragraph
(1). The preceding sentence shall apply to a cash
reimbursement for any transit pass only if a voucher or
similar item which may be exchanged only for a transit
pass is not readily available for direct distribution
by the employer to the employee.
(4) No constructive receipt.--No amount shall be
included in the gross income of an employee solely
because the employee may choose between any qualified
transportation fringe (other than a qualified bicycle
commuting reimbursement) and compensation which would
otherwise be includible in gross income of such
employee.
(5) Definitions.--For purposes of this subsection--
(A) Transit pass.--The term ``transit pass''
means any pass, token, farecard, voucher, or
similar item entitling a person to
transportation (or transportation at a reduced
price) if such transportation is--
(i) on mass transit facilities
(whether or not publicly owned), or
(ii) provided by any person in the
business of transporting persons for
compensation or hire if such
transportation is provided in a vehicle
meeting the requirements of
subparagraph (B)(i).
(B) Commuter highway vehicle.--The term
``commuter highway vehicle'' means any highway
vehicle--
(i) the seating capacity of which is
at least 6 adults (not including the
driver), and
(ii) at least 80 percent of the
mileage use of which can reasonably be
expected to be--
(I) for purposes of
transporting employees in
connection with travel between
their residences and their
place of employment, and
(II) on trips during which
the number of employees
transported for such purposes
is at least 1/2 of the adult
seating capacity of such
vehicle (not including the
driver).
(C) Qualified parking.--The term ``qualified
parking'' means parking provided to an employee
on or near the business premises of the
employer or on or near a location from which
the employee commutes to work by transportation
described in subparagraph (A), in a commuter
highway vehicle, or by carpool. Such term shall
not include any parking on or near property
used by the employee for residential purposes.
(D) Transportation provided by employer.--
Transportation referred to in paragraph (1)(A)
shall be considered to be provided by an
employer if such transportation is furnished in
a commuter highway vehicle operated by or for
the employer.
(E) Employee.--For purposes of this
subsection, the term ``employee'' does not
include an individual who is an employee within
the meaning of section 401(c)(1).
(F) Definitions related to bicycle commuting
reimbursement.--
(i) Qualified bicycle commuting
reimbursement.--The term ``qualified
bicycle commuting reimbursement''
means, with respect to any calendar
year, any employer reimbursement during
the 15-month period beginning with the
first day of such calendar year for
reasonable expenses incurred by the
employee during such calendar year for
the purchase of a bicycle and bicycle
improvements, repair, and storage, if
such bicycle is regularly used for
travel between the employee's residence
and place of employment.
(ii) Applicable annual limitation.--
The term ``applicable annual
limitation'' means, with respect to any
employee for any calendar year, the
product of $20 multiplied by the number
of qualified bicycle commuting months
during such year.
(iii) Qualified bicycle commuting
month.--The term ``qualified bicycle
commuting month'' means, with respect
to any employee, any month during which
such employee--
(I) regularly uses the
bicycle for a substantial
portion of the travel between
the employee's residence and
place of employment, and
(II) does not receive any
benefit described in
subparagraph (A), (B), or (C)
of paragraph (1).
(6) Inflation adjustment.--
(A) In general.--In the case of any taxable
year beginning in a calendar year after 1999,
the dollar amounts contained in subparagraphs
(A) and (B) of paragraph (2) shall be increased
by an amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
the calendar year in which the taxable
year begins, by substituting ``calendar
year 1998'' for ``calendar year 2016''
in subparagraph (A)(ii) thereof.
(B) Rounding.--If any increase determined
under subparagraph (A) is not a multiple of $5,
such increase shall be rounded to the next
lowest multiple of $5.
(7) Coordination with other provisions.--For purposes
of this section, the terms ``working condition fringe''
and ``de minimis fringe'' shall not include any
qualified transportation fringe (determined without
regard to paragraph (2)).
(8) Suspension of qualified bicycle commuting
reimbursement exclusion.--Paragraph (1)(D) shall not
apply to any taxable year beginning after December 31,
2017, and before January 1, 2026.
(g) Qualified moving expense reimbursement.--For purposes of
this section--
(1) In general.--The term ``qualified moving expense
reimbursement'' means any amount received (directly or
indirectly) by an individual from an employer as a
payment for (or a reimbursement of) expenses which
would be deductible as moving expenses under section
217 if directly paid or incurred by the individual.
Such term shall not include any payment for (or
reimbursement of) an expense actually deducted by the
individual in a prior taxable year.
(2) Suspension for taxable years 2018 through 2025.--
Except in the case of a member of the Armed Forces of
the United States on active duty who moves pursuant to
a military order and incident to a permanent change of
station, subsection (a)(6) shall not apply to any
taxable year beginning after December 31, 2017, and
before January 1, 2026.
(h) Certain individuals treated as employees for purposes of
subsections (a)(1) and (2).--For purposes of paragraphs (1) and
(2) of subsection (a)--
(1) Retired and disabled employees and surviving
spouse of employee treated as employee.--With respect
to a line of business of an employer, the term
``employee'' includes--
(A) any individual who was formerly employed
by such employer in such line of business and
who separated from service with such employer
in such line of business by reason of
retirement or disability, and
(B) any widow or widower of any individual
who died while employed by such employer in
such line of business or while an employee
within the meaning of subparagraph (A).
(2) Spouse and dependent children.--
(A) In general.--Any use by the spouse or a
dependent child of the employee shall be
treated as use by the employee.
(B) Dependent child.--For purposes of
subparagraph (A), the term ``dependent child''
means any child (as defined in section
152(f)(1)) of the employee--
(i) who is a dependent of the
employee, or
(ii) both of whose parents are
deceased and who has not attained age
25.
For purposes of the preceding sentence, any
child to whom section 152(e) applies shall be
treated as the dependent of both parents.
(3) Special rule for parents in the case of air
transportation.--Any use of air transportation by a
parent of an employee (determined without regard to
paragraph (1)(B)) shall be treated as use by the
employee.
(i) Reciprocal agreements.--For purposes of paragraph (1) of
subsection (a), any service provided by an employer to an
employee of another employer shall be treated as provided by
the employer of such employee if--
(1) such service is provided pursuant to a written
agreement between such employers, and
(2) neither of such employers incurs any substantial
additional costs (including foregone revenue) in
providing such service or pursuant to such agreement.
(j) Special rules.--
(1) Exclusions under subsection (a)(1) and (2) apply
to highly compensated employees only if no
discrimination.--Paragraphs (1) and (2) of subsection
(a) shall apply with respect to any fringe benefit
described therein provided with respect to any highly
compensated employee only if such fringe benefit is
available on substantially the same terms to each
member of a group of employees which is defined under a
reasonable classification set up by the employer which
does not discriminate in favor of highly compensated
employees.
(2) Special rule for leased sections of department
stores.--
(A) In general.--For purposes of paragraph
(2) of subsection (a), in the case of a leased
section of a department store--
(i) such section shall be treated as
part of the line of business of the
person operating the department store,
and
(ii) employees in the leased section
shall be treated as employees of the
person operating the department store.
(B) Leased section of department store.--For
purposes of subparagraph (A), a leased section
of a department store is any part of a
department store where over-the-counter sales
of property are made under a lease or similar
arrangement where it appears to the general
public that individuals making such sales are
employed by the person operating the department
store.
(3) Auto salesmen.--
(A) In general.--For purposes of subsection
(a)(3), qualified automobile demonstration use
shall be treated as a working condition fringe.
(B) Qualified automobile demonstration use.--
For purposes of subparagraph (A), the term
``qualified automobile demonstration use''
means any use of an automobile by a full-time
automobile salesman in the sales area in which
the automobile dealer's sales office is located
if--
(i) such use is provided primarily to
facilitate the salesman's performance
of services for the employer, and
(ii) there are substantial
restrictions on the personal use of
such automobile by such salesman.
(4) On-premises gyms and other athletic facilities.--
(A) In general.--Gross income shall not
include the value of any on-premises athletic
facility provided by an employer to his
employees.
(B) On-premises athletic facility.--For
purposes of this paragraph, the term ``on-
premises athletic facility'' means any gym or
other athletic facility--
(i) which is located on the premises
of the employer,
(ii) which is operated by the
employer, and
(iii) substantially all the use of
which is by employees of the employer,
their spouses, and their dependent
children (within the meaning of
subsection (h)).
(5) Special rule for affiliates of airlines.--
(A) In general.--If--
(i) a qualified affiliate is a member
of an affiliated group another member
of which operates an airline, and
(ii) employees of the qualified
affiliate who are directly engaged in
providing airline-related services are
entitled to no-additional-cost service
with respect to air transportation
provided by such other member,
then, for purposes of applying paragraph (1) of
subsection (a) to such no-additional-cost
service provided to such employees, such
qualified affiliate shall be treated as engaged
in the same line of business as such other
member.
(B) Qualified affiliate.--For purposes of
this paragraph, the term ``qualified
affiliate'' means any corporation which is
predominantly engaged in airline-related
services.
(C) Airline-related services.--For purposes
of this paragraph, the term ``airline-related
services'' means any of the following services
provided in connection with air transportation:
(i) Catering.
(ii) Baggage handling.
(iii) Ticketing and reservations.
(iv) Flight planning and weather
analysis.
(v) Restaurants and gift shops
located at an airport.
(vi) Such other similar services
provided to the airline as the
Secretary may prescribe.
(D) Affiliated group.--For purposes of this
paragraph, the term ``affiliated group'' has
the meaning given such term by section 1504(a).
(6) Highly compensated employee.--For purposes of
this section, the term ``highly compensated employee''
has the meaning given such term by section 414(q).
(7) Air cargo.--For purposes of subsection (b), the
transportation of cargo by air and the transportation
of passengers by air shall be treated as the same
service.
(8) Application of section to otherwise taxable
educational or training benefits.--Amounts paid or
expenses incurred by the employer for education or
training provided to the employee which are not
excludable from gross income under section 127 shall be
excluded from gross income under this section if (and
only if) such amounts or expenses are a working
condition fringe.
(k) Customers not to include employees.--For purposes of this
section (other than subsection (c)(2)), the term ``customers''
shall only include customers who are not employees.
(l) Section not to apply to fringe benefits expressly
provided for elsewhere.--This section (other than subsections
(e) and (g)) shall not apply to any fringe benefits of a type
the tax treatment of which is expressly provided for in any
other section of this chapter.
(m) Qualified retirement planning services.--
(1) In general.--For purposes of this section, the
term ``qualified retirement planning services'' means
any retirement planning advice or information provided
to an employee and [his spouse] the employee's spouse
by an employer maintaining a qualified employer plan.
(2) Nondiscrimination rule.--Subsection (a)(7) shall
apply in the case of highly compensated employees only
if such services are available on substantially the
same terms to each member of the group of employees
normally provided education and information regarding
the employer's qualified employer plan.
(3) Qualified employer plan.--For purposes of this
subsection, the term ``qualified employer plan'' means
a plan, contract, pension, or account described in
section 219(g)(5).
(n) Qualified military base realignment and closure fringe.--
For purposes of this section--
(1) In general.--The term ``qualified military base
realignment and closure fringe'' means 1 or more
payments under the authority of section 1013 of the
Demonstration Cities and Metropolitan Development Act
of 1966 (42 U.S.C. 3374) (as in effect on the date of
the enactment of the American Recovery and Reinvestment
Tax Act of 2009).
(2) Limitation.--With respect to any property, such
term shall not include any payment referred to in
paragraph (1) to the extent that the sum of all of such
payments related to such property exceeds the maximum
amount described in subsection (c) of such section (as
in effect on such date).
(o) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section.
* * * * * * *
SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY HIGHER
EDUCATION TUITION AND FEES.
(a) General rule.--In the case of an individual who pays
qualified higher education expenses during the taxable year, no
amount shall be includible in gross income by reason of the
redemption during such year of any qualified United States
savings bond.
(b) Limitations.--
(1) Limitation where redemption proceeds exceed
higher education expenses.--
(A) In general.--If--
(i) the aggregate proceeds of
qualified United States savings bonds
redeemed by the taxpayer during the
taxable year exceed
(ii) the qualified higher education
expenses paid by the taxpayer during
such taxable year,
the amount excludable from gross income under
subsection (a) shall not exceed the applicable
fraction of the amount excludable from gross
income under subsection (a) without regard to
this subsection.
(B) Applicable fraction.--For purposes of
subparagraph (A), the term ``applicable
fraction'' means the fraction the numerator of
which is the amount described in subparagraph
(A)(ii) and the denominator of which is the
amount described in subparagraph (A)(i).
(2) Limitation based on modified adjusted gross
income.--
(A) In general.--If the modified adjusted
gross income of the taxpayer for the taxable
year exceeds $40,000 ($60,000 in the case of a
joint return), the amount which would (but for
this paragraph) be excludable from gross income
under subsection (a) shall be reduced (but not
below zero) by the amount which bears the same
ratio to the amount which would be so
excludable as such excess bears to $15,000
($30,000 in the case of a joint return).
(B) Inflation adjustment.--In the case of any
taxable year beginning in a calendar year after
1990, the $40,000 and $60,000 amounts contained
in subparagraph (A) shall be increased by an
amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
under section 1(f)(3) for the calendar
year in which the taxable year begins,
determined by substituting ``calendar
year 1989'' for ``calendar year 2016''
in subparagraph (A)(ii) thereof.
(C) Rounding.--If any amount as adjusted
under subparagraph (B) is not a multiple of
$50, such amount shall be rounded to the
nearest multiple of $50 (or if such amount is a
multiple of $25, such amount shall be rounded
to the next highest multiple of $50).
(c) Definitions.--For purposes of this section--
(1) Qualified United States savings bond.--The term
``qualified United States savings bond'' means any
United States savings bond issued--
(A) after December 31, 1989,
(B) to an individual who has attained age 24
before the date of issuance, and
(C) at discount under section 3105 of title
31, United States Code.
(2) Qualified higher education expenses.--
(A) In general.--The term ``qualified higher
education expenses'' means tuition and fees
required for the enrollment or attendance of--
(i) the taxpayer,
(ii) the taxpayer's spouse, or
(iii) any dependent of the taxpayer
with respect to whom the taxpayer is
allowed a deduction under section 151,
at an eligible educational institution.
(B) Exception for education involving sports,
etc..--Such term shall not include expenses
with respect to any course or other education
involving sports, games, or hobbies other than
as part of a degree program.
(C) Contributions to qualified tuition
program and Coverdell education savings
accounts.--Such term shall include any
contribution to a qualified tuition program (as
defined in section 529) on behalf of a
designated beneficiary (as defined in such
section), or to a Coverdell education savings
account (as defined in section 530) on behalf
of an account beneficiary, who is an individual
described in subparagraph (A); but there shall
be no increase in the investment in the
contract for purposes of applying section 72 by
reason of any portion of such contribution
which is not includible in gross income by
reason of this subparagraph.
(3) Eligible educational institution.--The term
``eligible educational institution'' has the meaning
given such term by section 529(e)(5).
(4) Modified adjusted gross income.--The term
``modified adjusted gross income'' means the adjusted
gross income of the taxpayer for the taxable year
determined--
(A) without regard to this section and
sections 137, 221, 222, 911, 931, and 933, and
(B) after the application of sections 86,
469, and 219.
(d) Special rules.--
(1) Adjustment for certain scholarships and veterans
benefits.--The amount of qualified higher education
expenses otherwise taken into account under subsection
(a) with respect to the education of an individual
shall be reduced (before the application of subsection
(b)) by the sum of the amounts received with respect to
such individual for the taxable year as--
(A) a qualified scholarship which under
section 117 is not includable in gross income,
(B) an educational assistance allowance under
chapter 30, 31, 32, 34, or 35 of title 38,
United States Code,
(C) a payment (other than a gift, bequest,
devise, or inheritance within the meaning of
section 102(a)) for educational expenses, or
attributable to attendance at an eligible
educational institution, which is exempt from
income taxation by any law of the United
States, or
(D) a payment, waiver, or reimbursement of
qualified higher education expenses under a
qualified tuition program (within the meaning
of section 529(b)).
(2) Coordination with other higher education
benefits.--The amount of the qualified higher education
expenses otherwise taken into account under subsection
(a) with respect to the education of an individual
shall be reduced (before the application of subsection
(b)) by--
(A) the amount of such expenses which are
taken into account in determining the credit
allowed to the taxpayer or any other person
under section 25A with respect to such
expenses; and
(B) the amount of such expenses which are
taken into account in determining the
exclusions under sections 529(c)(3)(B) and
530(d)(2).
(3) No exclusion for married individuals filing
separate returns.--If the taxpayer is a married
individual (within the meaning of section 7703), this
section shall apply only if the taxpayer and [his
spouse] the taxpayer's spouse file a joint return for
the taxable year.
(4) Regulations.--The Secretary may prescribe such
regulations as may be necessary or appropriate to carry
out this section, including regulations requiring
record keeping and information reporting.
* * * * * * *
PART V--DEDUCTIONS FOR PERSONAL EXEMPTIONS
* * * * * * *
SEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS.
(a) Allowance of deductions.--In the case of an individual,
the exemptions provided by this section shall be allowed as
deductions in computing taxable income.
(b) Taxpayer and spouse.--An exemption of the exemption
amount for the taxpayer; and an additional exemption of the
exemption amount for the spouse of the taxpayer if a joint
return is not made by the taxpayer and [his spouse] the
taxpayer's spouse , and if the spouse, for the calendar year in
which the taxable year of the taxpayer begins, has no gross
income and is not the dependent of another taxpayer.
(c) Additional exemption for dependents.--An exemption of the
exemption amount for each individual who is a dependent (as
defined in section 152) of the taxpayer for the taxable year.
(d) Exemption amount.--For purposes of this section--
(1) In general.--Except as otherwise provided in this
subsection, the term ``exemption amount'' means $2,000.
(2) Exemption amount disallowed in case of certain
dependents.--In the case of an individual with respect
to whom a deduction under this section is allowable to
another taxpayer for a taxable year beginning in the
calendar year in which the individual's taxable year
begins, the exemption amount applicable to such
individual for such individual's taxable year shall be
zero.
(3) Phaseout.--
(A) In general.--In the case of any taxpayer
whose adjusted gross income for the taxable
year exceeds the applicable amount in effect
under section 68(b), the exemption amount shall
be reduced by the applicable percentage.
(B) Applicable percentage.--For purposes of
subparagraph (A), the term ``applicable
percentage'' means 2 percentage points for each
$2,500 (or fraction thereof) by which the
taxpayer's adjusted gross income for the
taxable year exceeds the applicable amount in
effect under section 68(b). In the case of a
married individual filing a separate return,
the preceding sentence shall be applied by
substituting ``$1,250'' for ``$2,500''. In no
event shall the applicable percentage exceed
100 percent.
(C) Coordination with other provisions.--The
provisions of this paragraph shall not apply
for purposes of determining whether a deduction
under this section with respect to any
individual is allowable to another taxpayer for
any taxable year.
(4) Inflation adjustment.--Except as provided in
paragraph (5), in the case of any taxable year
beginning in a calendar year after 1989, the dollar
amount contained in paragraph (1) shall be increased by
an amount equal to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, by substituting
``calendar year 1988'' for ``calendar year
2016'' in subparagraph (A)(ii) thereof.
(5) Special rules for taxable years 2018 through
2025.--In the case of a taxable year beginning after
December 31, 2017, and before January 1, 2026--
(A) Exemption amount.--The term ``exemption
amount'' means zero.
(B) References.--For purposes of any other
provision of this title, the reduction of the
exemption amount to zero under subparagraph (A)
shall not be taken into account in determining
whether a deduction is allowed or allowable, or
whether a taxpayer is entitled to a deduction,
under this section.
(e) Identifying information required.--No exemption shall be
allowed under this section with respect to any individual
unless the TIN of such individual is included on the return
claiming the exemption.
* * * * * * *
PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
* * * * * * *
SEC. 165. LOSSES.
(a) General rule.--There shall be allowed as a deduction any
loss sustained during the taxable year and not compensated for
by insurance or otherwise.
(b) Amount of deduction.--For purposes of subsection (a), the
basis for determining the amount of the deduction for any loss
shall be the adjusted basis provided in section 1011 for
determining the loss from the sale or other disposition of
property.
(c) Limitation on losses of individuals.--In the case of an
individual, the deduction under subsection (a) shall be limited
to--
(1) losses incurred in a trade or business;
(2) losses incurred in any transaction entered into
for profit, though not connected with a trade or
business; and
(3) except as provided in subsection (h), losses of
property not connected with a trade or business or a
transaction entered into for profit, if such losses
arise from fire, storm, shipwreck, or other casualty,
or from theft.
(d) Wagering losses.--Losses from wagering transactions shall
be allowed only to the extent of the gains from such
transactions. For purposes of the preceding sentence, in the
case of taxable years beginning after December 31, 2017, and
before January 1, 2026, the term ``losses from wagering
transactions'' includes any deduction otherwise allowable under
this chapter incurred in carrying on any wagering transaction.
(e) Theft losses.--For purposes of subsection (a), any loss
arising from theft shall be treated as sustained during the
taxable year in which the taxpayer discovers such loss.
(f) Capital losses.--Losses from sales or exchanges of
capital assets shall be allowed only to the extent allowed in
sections 1211 and 1212.
(g) Worthless securities.--
(1) General rule.--If any security which is a capital
asset becomes worthless during the taxable year, the
loss resulting therefrom shall, for purposes of this
subtitle, be treated as a loss from the sale or
exchange, on the last day of the taxable year, of a
capital asset.
(2) Security defined.--For purposes of this
subsection, the term ``security'' means--
(A) a share of stock in a corporation;
(B) a right to subscribe for, or to receive,
a share of stock in a corporation; or
(C) a bond, debenture, note, or certificate,
or other evidence of indebtedness, issued by a
corporation or by a government or political
subdivision thereof, with interest coupons or
in registered form.
(3) Securities in affiliated corporation.--For
purposes of paragraph (1), any security in a
corporation affiliated with a taxpayer which is a
domestic corporation shall not be treated as a capital
asset. For purposes of the preceding sentence, a
corporation shall be treated as affiliated with the
taxpayer only if--
(A) the taxpayer owns directly stock in such
corporation meeting the requirements of section
1504(a)(2), and
(B) more than 90 percent of the aggregate of
its gross receipts for all taxable years has
been from sources other than royalties, rents
(except rents derived from rental of properties
to employees of the corporation in the ordinary
course of its operating business), dividends,
interest (except interest received on deferred
purchase price of operating assets sold),
annuities, and gains from sales or exchanges of
stocks and securities.
In computing gross receipts for purposes of the
preceding sentence, gross receipts from sales or
exchanges of stocks and securities shall be taken into
account only to the extent of gains therefrom.
(h) Treatment of casualty gains and losses.--
(1) Dollar limitation per casualty.--Any loss of an
individual described in subsection (c)(3) shall be
allowed only to the extent that the amount of the loss
to such individual arising from each casualty, or from
each theft, exceeds $500 ($100 for taxable years
beginning after December 31, 2009).
(2) Net casualty loss allowed only to the extent it
exceeds 10 percent of adjusted gross income.--
(A) In general.--If the personal casualty
losses for any taxable year exceed the personal
casualty gains for such taxable year, such
losses shall be allowed for the taxable year
only to the extent of the sum of--
(i) the amount of the personal
casualty gains for the taxable year,
plus
(ii) so much of such excess as
exceeds 10 percent of the adjusted
gross income of the individual.
(B) Special rule where personal casualty
gains exceed personal casualty losses.--If the
personal casualty gains for any taxable year
exceed the personal casualty losses for such
taxable year--
(i) all such gains shall be treated
as gains from sales or exchanges of
capital assets, and
(ii) all such losses shall be treated
as losses from sales or exchanges of
capital assets.
(3) Definitions of personal casualty gain and
personal casualty loss.--For purposes of this
subsection--
(A) Personal casualty gain.--The term
``personal casualty gain'' means the recognized
gain from any involuntary conversion of
property which is described in subsection
(c)(3) arising from fire, storm, shipwreck, or
other casualty, or from theft.
(B) Personal casualty loss.--The term
``personal casualty loss'' means any loss
described in subsection (c)(3). For purposes of
paragraph (2), the amount of any personal
casualty loss shall be determined after the
application of paragraph (1).
(4) Special rules.--
(A) Personal casualty losses allowable in
computing adjusted gross income to the extent
of personal casualty gains.--In any case to
which paragraph (2)(A) applies, the deduction
for personal casualty losses for any taxable
year shall be treated as a deduction allowable
in computing adjusted gross income to the
extent such losses do not exceed the personal
casualty gains for the taxable year.
(B) Joint returns.--For purposes of this
subsection, a [husband and wife] married couple
making a joint return for the taxable year
shall be treated as 1 individual.
(C) Determination of adjusted gross income in
case of estates and trusts.--For purposes of
paragraph (2), the adjusted gross income of an
estate or trust shall be computed in the same
manner as in the case of an individual, except
that the deductions for costs paid or incurred
in connection with the administration of the
estate or trust shall be treated as allowable
in arriving at adjusted gross income.
(D) Coordination with estate tax.--No loss
described in subsection (c)(3) shall be allowed
if, at the time of filing the return, such loss
has been claimed for estate tax purposes in the
estate tax return.
(E) Claim required to be filed in certain
cases.--Any loss of an individual described in
subsection (c)(3) to the extent covered by
insurance shall be taken into account under
this section only if the individual files a
timely insurance claim with respect to such
loss.
(5) Limitation for taxable years 2018 through 2025.--
(A) In general.--In the case of an
individual, except as provided in subparagraph
(B), any personal casualty loss which (but for
this paragraph) would be deductible in a
taxable year beginning after December 31, 2017,
and before January 1, 2026, shall be allowed as
a deduction under subsection (a) only to the
extent it is attributable to a Federally
declared disaster (as defined in subsection
(i)(5)).
(B) Exception related to personal casualty
gains.--If a taxpayer has personal casualty
gains for any taxable year to which
subparagraph (A) applies--
(i) subparagraph (A) shall not apply
to the portion of the personal casualty
loss not attributable to a Federally
declared disaster (as so defined) to
the extent such loss does not exceed
such gains, and
(ii) in applying paragraph (2) for
purposes of subparagraph (A) to the
portion of personal casualty loss which
is so attributable to such a disaster,
the amount of personal casualty gains
taken into account under paragraph
(2)(A) shall be reduced by the portion
of such gains taken into account under
clause (i).
(i) Disaster losses.--
(1) Election to take deduction for preceding year.--
Notwithstanding the provisions of subsection (a), any
loss occurring in a disaster area and attributable to a
federally declared disaster may, at the election of the
taxpayer, be taken into account for the taxable year
immediately preceding the taxable year in which the
disaster occurred.
(2) Year of loss.--If an election is made under this
subsection, the casualty resulting in the loss shall be
treated for purposes of this title as having occurred
in the taxable year for which the deduction is claimed.
(3) Amount of loss.--The amount of the loss taken
into account in the preceding taxable year by reason of
paragraph (1) shall not exceed the uncompensated amount
determined on the basis of the facts existing at the
date the taxpayer claims the loss.
(4) Use of disaster loan appraisals to establish
amount of loss.--Nothing in this title shall be
construed to prohibit the Secretary from prescribing
regulations or other guidance under which an appraisal
for the purpose of obtaining a loan of Federal funds or
a loan guarantee from the Federal Government as a
result of a federally declared disaster may be used to
establish the amount of any loss described in paragraph
(1) or (2).
(5) Federally declared disasters.--For purposes of
this subsection--
(A) In general.--The term ``Federally
declared disaster'' means any disaster
subsequently determined by the President of the
United States to warrant assistance by the
Federal Government under the Robert T. Stafford
Disaster Relief and Emergency Assistance Act.
(B) Disaster area.--The term ``disaster
area'' means the area so determined to warrant
such assistance.
(j) Denial of deduction for losses on certain obligations not
in registered form.--
(1) In general.--Nothing in subsection (a) or in any
other provision of law shall be construed to provide a
deduction for any loss sustained on any registration-
required obligation unless such obligation is in
registered form (or the issuance of such obligation was
subject to tax under section 4701).
(2) Definitions.--For purposes of this subsection--
(A) Registration-required obligation.--The
term ``registration-required obligation'' has
the meaning given to such term by section
163(f)(2).
(B) Registered form.--The term ``registered
form'' has the same meaning as when used in
section 163(f).
(3) Exceptions.--The Secretary may, by regulations,
provide that this subsection and section 1287 shall not
apply with respect to obligations held by any person
if--
(A) such person holds such obligations in
connection with a trade or business outside the
United States,
(B) such person holds such obligations as a
broker dealer (registered under Federal or
State law) for sale to customers in the
ordinary course of his trade or business,
(C) such person complies with reporting
requirements with respect to ownership,
transfers, and payments as the Secretary may
require, or
(D) such person promptly surrenders the
obligation to the issuer for the issuance of a
new obligation in registered form,
but only if such obligations are held under
arrangements provided in regulations or otherwise which
are designed to assure that such obligations are not
delivered to any United States person other than a
person described in subparagraph (A), (B), or (C).
(k) Treatment as disaster loss where taxpayer ordered to
demolish or relocate residence in disaster area because of
disaster.--In the case of a taxpayer whose residence is located
in an area which has been determined by the President of the
United States to warrant assistance by the Federal Government
under the Robert T. Stafford Disaster Relief and Emergency
Assistance Act, if--
(1) not later than the 120th day after the date of
such determination, the taxpayer is ordered, by the
government of the State or any political subdivision
thereof in which such residence is located, to demolish
or relocate such residence, and
(2) the residence has been rendered unsafe for use as
a residence by reason of the disaster,
any loss attributable to such disaster shall be treated as a
loss which arises from a casualty and which is described in
subsection (i).
(l) Treatment of certain losses in insolvent financial
institutions.--
(1) In general.--If--
(A) as of the close of the taxable year, it
can reasonably be estimated that there is a
loss on a qualified individual's deposit in a
qualified financial institution, and
(B) such loss is on account of the bankruptcy
or insolvency of such institution,
then the taxpayer may elect to treat the amount so
estimated as a loss described in subsection (c)(3)
incurred during the taxable year.
(2) Qualified individual defined.--For purposes of
this subsection, the term ``qualified individual''
means any individual, except an individual--
(A) who owns at least 1 percent in value of
the outstanding stock of the qualified
financial institution,
(B) who is an officer of the qualified
financial institution,
(C) who is a sibling (whether by the whole or
half blood), spouse, aunt, uncle, nephew,
niece, ancestor, or lineal descendant of an
individual described in subparagraph (A) or
(B), or
(D) who otherwise is a related person (as
defined in section 267(b)) with respect to an
individual described in subparagraph (A) or
(B).
(3) Qualified financial institution.--For purposes of
this subsection, the term ``qualified financial
institution'' means--
(A) any bank (as defined in section 581),
(B) any institution described in section 591,
(C) any credit union the deposits or accounts
in which are insured under Federal or State law
or are protected or guaranteed under State law,
or
(D) any similar institution chartered and
supervised under Federal or State law.
(4) Deposit.--For purposes of this subsection, the
term ``deposit'' means any deposit, withdrawable
account, or withdrawable or repurchasable share.
(5) Election to treat as ordinary loss.--
(A) In general.--In lieu of any election
under paragraph (1), the taxpayer may elect to
treat the amount referred to in paragraph (1)
for the taxable year as an ordinary loss
described in subsection (c)(2) incurred during
the taxable year.
(B) Limitations.--
(i) Deposit may not be federally
insured.--No election may be made under
subparagraph (A) with respect to any
loss on a deposit in a qualified
financial institution if part or all of
such deposit is insured under Federal
law.
(ii) Dollar limitation.--With respect
to each financial institution, the
aggregate amount of losses attributable
to deposits in such financial
institution to which an election under
subparagraph (A) may be made by the
taxpayer for any taxable year shall not
exceed $20,000 ($10,000 in the case of
a separate return by a married
individual). The limitation of the
preceding sentence shall be reduced by
the amount of any insurance proceeds
under any State law which can
reasonably be expected to be received
with respect to losses on deposits in
such institution.
(6) Election.--Any election by the taxpayer under
this subsection for any taxable year--
(A) shall apply to all losses for such
taxable year of the taxpayer on deposits in the
institution with respect to which such election
was made, and
(B) may be revoked only with the consent of
the Secretary.
(7) Coordination with section 166.--Section 166 shall
not apply to any loss to which an election under this
subsection applies.
(m) Cross references.--
(1) For special rule for banks with respect
to worthless securities, see section 582.
(2) For disallowance of deduction for
worthlessness of securities to which subsection
(g)(2)(C) applies, if issued by a political
party or similar organization, see section 271.
(3) For special rule for losses on stock in a
small business investment company, see section
1242.
(4) For special rule for losses of a small
business investment company, see section 1243.
(5) For special rule for losses on small
business stock, see section 1244.
* * * * * * *
SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.
(a) Allowance of deduction.--
(1) General rule.--There shall be allowed as a
deduction any charitable contribution (as defined in
subsection (c)) payment of which is made within the
taxable year. A charitable contribution shall be
allowable as a deduction only if verified under
regulations prescribed by the Secretary.
(2) Corporations on accrual basis.--In the case of a
corporation reporting its taxable income on the accrual
basis, if--
(A) the board of directors authorizes a
charitable contribution during any taxable
year, and
(B) payment of such contribution is made
after the close of such taxable year and on or
before the 15th day of the fourth month
following the close of such taxable year,
then the taxpayer may elect to treat such contribution
as paid during such taxable year. The election may be
made only at the time of the filing of the return for
such taxable year, and shall be signified in such
manner as the Secretary shall by regulations prescribe.
(3) Future interests in tangible personal property.--
For purposes of this section, payment of a charitable
contribution which consists of a future interest in
tangible personal property shall be treated as made
only when all intervening interests in, and rights to
the actual possession or enjoyment of, the property
have expired or are held by persons other than the
taxpayer or those standing in a relationship to the
taxpayer described in section 267(b) or 707(b). For
purposes of the preceding sentence, a fixture which is
intended to be severed from the real property shall be
treated as tangible personal property.
(b) Percentage limitations.--
(1) Individuals.--In the case of an individual, the
deduction provided in subsection (a) shall be limited
as provided in the succeeding subparagraphs.
(A) General rule.--Any charitable
contribution to--
(i) a church or a convention or
association of churches,
(ii) an educational organization
which normally maintains a regular
faculty and curriculum and normally has
a regularly enrolled body of pupils or
students in attendance at the place
where its educational activities are
regularly carried on,
(iii) an organization the principal
purpose or functions of which are the
providing of medical or hospital care
or medical education or medical
research, if the organization is a
hospital, or if the organization is a
medical research organization directly
engaged in the continuous active
conduct of medical research in
conjunction with a hospital, and during
the calendar year in which the
contribution is made such organization
is committed to spend such
contributions for such research before
January 1 of the fifth calendar year
which begins after the date such
contribution is made,
(iv) an organization which normally
receives a substantial part of its
support (exclusive of income received
in the exercise or performance by such
organization of its charitable,
educational, or other purpose or
function constituting the basis for its
exemption under section 501(a)) from
the United States or any State or
political subdivision thereof or from
direct or indirect contributions from
the general public, and which is
organized and operated exclusively to
receive, hold, invest, and administer
property and to make expenditures to or
for the benefit of a college or
university which is an organization
referred to in clause (ii) of this
subparagraph and which is an agency or
instrumentality of a State or political
subdivision thereof, or which is owned
or operated by a State or political
subdivision thereof or by an agency or
instrumentality of one or more States
or political subdivisions,
(v) a governmental unit referred to
in subsection (c)(1),
(vi) an organization referred to in
subsection (c)(2) which normally
receives a substantial part of its
support (exclusive of income received
in the exercise or performance by such
organization of its charitable,
educational, or other purpose or
function constituting the basis for its
exemption under section 501(a)) from a
governmental unit referred to in
subsection (c)(1) or from direct or
indirect contributions from the general
public,
(vii) a private foundation described
in subparagraph (F),
(viii) an organization described in
section 509(a)(2) or (3), or
(ix) an agricultural research
organization directly engaged in the
continuous active conduct of
agricultural research (as defined in
section 1404 of the National
Agricultural Research, Extension, and
Teaching Policy Act of 1977) in
conjunction with a land-grant college
or university (as defined in such
section) or a non-land grant college of
agriculture (as defined in such
section), and during the calendar year
in which the contribution is made such
organization is committed to spend such
contribution for such research before
January 1 of the fifth calendar year
which begins after the date such
contribution is made,
shall be allowed to the extent that the
aggregate of such contributions does not exceed
50 percent of the taxpayer's contribution base
for the taxable year.
(B) Other contributions.--Any charitable
contribution other than a charitable
contribution to which subparagraph (A) applies
shall be allowed to the extent that the
aggregate of such contributions does not exceed
the lesser of--
(i) 30 percent of the taxpayer's
contribution base for the taxable year,
or
(ii) the excess of 50 percent of the
taxpayer's contribution base for the
taxable year over the amount of
charitable contributions allowable
under subparagraph (A) (determined
without regard to subparagraph (C)).
If the aggregate of such contributions exceeds
the limitation of the preceding sentence, such
excess shall be treated (in a manner consistent
with the rules of subsection (d)(1)) as a
charitable contribution (to which subparagraph
(A) does not apply) in each of the 5 succeeding
taxable years in order of time.
(C) Special limitation with respect to
contributions described in subparagraph (A) of
certain capital gain property.--
(i) In the case of charitable
contributions described in subparagraph
(A) of capital gain property to which
subsection (e)(1)(B) does not apply,
the total amount of contributions of
such property which may be taken into
account under subsection (a) for any
taxable year shall not exceed 30
percent of the taxpayer's contribution
base for such year. For purposes of
this subsection, contributions of
capital gain property to which this
subparagraph applies shall be taken
into account after all other charitable
contributions (other than charitable
contributions to which subparagraph (D)
applies).
(ii) If charitable contributions
described in subparagraph (A) of
capital gain property to which clause
(i) applies exceeds 30 percent of the
taxpayer's contribution base for any
taxable year, such excess shall be
treated, in a manner consistent with
the rules of subsection (d)(1), as a
charitable contribution of capital gain
property to which clause (i) applies in
each of the 5 succeeding taxable years
in order of time.
(iii) At the election of the taxpayer
(made at such time and in such manner
as the Secretary prescribes by
regulations), subsection (e)(1) shall
apply to all contributions of capital
gain property (to which subsection
(e)(1)(B) does not otherwise apply)
made by the taxpayer during the taxable
year. If such an election is made,
clauses (i) and (ii) shall not apply to
contributions of capital gain property
made during the taxable year, and, in
applying subsection (d)(1) for such
taxable year with respect to
contributions of capital gain property
made in any prior contribution year for
which an election was not made under
this clause, such contributions shall
be reduced as if subsection (e)(1) had
applied to such contributions in the
year in which made.
(iv) For purposes of this paragraph,
the term ``capital gain property''
means, with respect to any
contribution, any capital asset the
sale of which at its fair market value
at the time of the contribution would
have resulted in gain which would have
been long-term capital gain. For
purposes of the preceding sentence, any
property which is property used in the
trade or business (as defined in
section 1231(b)) shall be treated as a
capital asset.
(D) Special limitation with respect to
contributions of capital gain property to
organizations not described in subparagraph
(A).--
(i) In general.--In the case of
charitable contributions (other than
charitable contributions to which
subparagraph (A) applies) of capital
gain property, the total amount of such
contributions of such property taken
into account under subsection (a) for
any taxable year shall not exceed the
lesser of--
(I) 20 percent of the
taxpayer's contribution base
for the taxable year, or
(II) the excess of 30 percent
of the taxpayer's contribution
base for the taxable year over
the amount of the contributions
of capital gain property to
which subparagraph (C) applies.
For purposes of this subsection, contributions
of capital gain property to which this
subparagraph applies shall be taken into
account after all other charitable
contributions.
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the limitation of
clause (i), such excess shall be
treated (in a manner consistent with
the rules of subsection (d)(1)) as a
charitable contribution of capital gain
property to which clause (i) applies in
each of the 5 succeeding taxable years
in order of time.
(E) Contributions of qualified conservation
contributions.--
(i) In general.--Any qualified
conservation contribution (as defined
in subsection (h)(1)) shall be allowed
to the extent the aggregate of such
contributions does not exceed the
excess of 50 percent of the taxpayer's
contribution base over the amount of
all other charitable contributions
allowable under this paragraph.
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the limitation of
clause (i), such excess shall be
treated (in a manner consistent with
the rules of subsection (d)(1)) as a
charitable contribution to which clause
(i) applies in each of the 15
succeeding years in order of time.
(iii) Coordination with other
subparagraphs.--For purposes of
applying this subsection and subsection
(d)(1), contributions described in
clause (i) shall not be treated as
described in subparagraph (A), (B),
(C), or (D) and such subparagraphs
shall apply without regard to such
contributions.
(iv) Special rule for contribution of
property used in agriculture or
livestock production.--
(I) In general.--If the
individual is a qualified
farmer or rancher for the
taxable year for which the
contribution is made, clause
(i) shall be applied by
substituting ``100 percent''
for ``50 percent''.
(II) Exception.--Subclause
(I) shall not apply to any
contribution of property made
after the date of the enactment
of this subparagraph which is
used in agriculture or
livestock production (or
available for such production)
unless such contribution is
subject to a restriction that
such property remain available
for such production. This
subparagraph shall be applied
separately with respect to
property to which subclause (I)
does not apply by reason of the
preceding sentence prior to its
application to property to
which subclause (I) does apply.
(v) Definition.--For purposes of
clause (iv), the term ``qualified
farmer or rancher'' means a taxpayer
whose gross income from the trade or
business of farming (within the meaning
of section 2032A(e)(5)) is greater than
50 percent of the taxpayer's gross
income for the taxable year.
(F) Certain private foundations.--The private
foundations referred to in subparagraph
(A)(vii) and subsection (e)(1)(B) are--
(i) a private operating foundation
(as defined in section 4942(j)(3)),
(ii) any other private foundation (as
defined in section 509(a)) which, not
later than the 15th day of the third
month after the close of the
foundation's taxable year in which
contributions are received, makes
qualifying distributions (as defined in
section 4942(g), without regard to
paragraph (3) thereof), which are
treated, after the application of
section 4942(g)(3), as distributions
out of corpus (in accordance with
section 4942(h)) in an amount equal to
100 percent of such contributions, and
with respect to which the taxpayer
obtains adequate records or other
sufficient evidence from the foundation
showing that the foundation made such
qualifying distributions, and
(iii) a private foundation all of the
contributions to which are pooled in a
common fund and which would be
described in section 509(a)(3) but for
the right of any substantial
contributor (hereafter in this clause
called ``donor'') or [his spouse] the
spouse of such donor to designate
annually the recipients, from among
organizations described in paragraph
(1) of section 509(a), of the income
attributable to the donor's
contribution to the fund and to direct
(by deed or by will) the payment, to an
organization described in such
paragraph (1), of the corpus in the
common fund attributable to the donor's
contribution; but this clause shall
apply only if all of the income of the
common fund is required to be (and is)
distributed to one or more
organizations described in such
paragraph (1) not later than the 15th
day of the third month after the close
of the taxable year in which the income
is realized by the fund and only if all
of the corpus attributable to any
donor's contribution to the fund is
required to be (and is) distributed to
one or more of such organizations not
later than one year after [his death or
after the death of his surviving spouse
if she] the death of the donor or after
the death of the donor's surviving
spouse if such surviving spouse has the
right to designate the recipients of
such corpus.
(G) Increased limitation for cash
contributions.--
(i) In general.--In the case of any
contribution of cash to an organization
described in subparagraph (A), the
total amount of such contributions
which may be taken into account under
subsection (a) for any taxable year
beginning after December 31, 2017, and
before January 1, 2026, shall not
exceed 60 percent of the taxpayer's
contribution base for such year.
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the applicable
limitation under clause (i) for any
taxable year described in such clause,
such excess shall be treated (in a
manner consistent with the rules of
subsection (d)(1)) as a charitable
contribution to which clause (i)
applies in each of the 5 succeeding
years in order of time.
(iii) Coordination with subparagraphs
(A) and (B).--
(I) In general.--
Contributions taken into
account under this subparagraph
shall not be taken into account
under subparagraph (A).
(II) Limitation reduction.--
For each taxable year described
in clause (i), and each taxable
year to which any contribution
under this subparagraph is
carried over under clause (ii),
subparagraph (A) shall be
applied by reducing (but not
below zero) the contribution
limitation allowed for the
taxable year under such
subparagraph by the aggregate
contributions allowed under
this subparagraph for such
taxable year, and subparagraph
(B) shall be applied by
treating any reference to
subparagraph (A) as a reference
to both subparagraph (A) and
this subparagraph.
(H) Contribution base defined.--For purposes
of this section, the term ``contribution base''
means adjusted gross income (computed without
regard to any net operating loss carryback to
the taxable year under section 172).
(2) Corporations.--In the case of a corporation--
(A) In general.--The total deductions under
subsection (a) for any taxable year (other than
for contributions to which subparagraph (B) or
(C) applies) shall not exceed 10 percent of the
taxpayer's taxable income.
(B) Qualified conservation contributions by
certain corporate farmers and ranchers.--
(i) In general.--Any qualified
conservation contribution (as defined
in subsection (h)(1))--
(I) which is made by a
corporation which, for the
taxable year during which the
contribution is made, is a
qualified farmer or rancher (as
defined in paragraph (1)(E)(v))
and the stock of which is not
readily tradable on an
established securities market
at any time during such year,
and
(II) which, in the case of
contributions made after the
date of the enactment of this
subparagraph, is a contribution
of property which is used in
agriculture or livestock
production (or available for
such production) and which is
subject to a restriction that
such property remain available
for such production,
shall be allowed to the extent the aggregate
of such contributions does not exceed the
excess of the taxpayer's taxable income over
the amount of charitable contributions
allowable under subparagraph (A).
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the limitation of
clause (i), such excess shall be
treated (in a manner consistent with
the rules of subsection (d)(2)) as a
charitable contribution to which clause
(i) applies in each of the 15
succeeding taxable years in order of
time.
(C) Qualified conservation contributions by
certain Native Corporations.--
(i) In general.--Any qualified
conservation contribution (as defined
in subsection (h)(1)) which--
(I) is made by a Native
Corporation, and
(II) is a contribution of
property which was land
conveyed under the Alaska
Native Claims Settlement Act,
shall be allowed to the extent that the
aggregate amount of such contributions does not
exceed the excess of the taxpayer's taxable
income over the amount of charitable
contributions allowable under subparagraph (A).
(ii) Carryover.--If the aggregate
amount of contributions described in
clause (i) exceeds the limitation of
clause (i), such excess shall be
treated (in a manner consistent with
the rules of subsection (d)(2)) as a
charitable contribution to which clause
(i) applies in each of the 15
succeeding taxable years in order of
time.
(iii) Native Corporation.--For
purposes of this subparagraph, the term
``Native Corporation'' has the meaning
given such term by section 3(m) of the
Alaska Native Claims Settlement Act.
(D) Taxable income.--For purposes of this
paragraph, taxable income shall be computed
without regard to--
(i) this section,
(ii) part VIII (except section 248),
(iii) any net operating loss
carryback to the taxable year under
section 172,
(iv) any capital loss carryback to
the taxable year under section
1212(a)(1)
(v) section 199A(g).
(c) Charitable contribution defined.--For purposes of this
section, the term ``charitable contribution'' means a
contribution or gift to or for the use of--
(1) A State, a possession of the United States, or
any political subdivision of any of the foregoing, or
the United States or the District of Columbia, but only
if the contribution or gift is made for exclusively
public purposes.
(2) A corporation, trust, or community chest, fund,
or foundation--
(A) created or organized in the United States
or in any possession thereof, or under the law
of the United States, any State, the District
of Columbia, or any possession of the United
States;
(B) organized and operated exclusively for
religious, charitable, scientific, literary, or
educational purposes, or to foster national or
international amateur sports competition (but
only if no part of its activities involve the
provision of athletic facilities or equipment),
or for the prevention of cruelty to children or
animals;
(C) no part of the net earnings of which
inures to the benefit of any private
shareholder or individual; and
(D) which is not disqualified for tax
exemption under section 501(c)(3) by reason of
attempting to influence legislation, and which
does not participate in, or intervene in
(including the publishing or distributing of
statements), any political campaign on behalf
of (or in opposition to) any candidate for
public office.
A contribution or gift by a corporation to a trust,
chest, fund, or foundation shall be deductible by
reason of this paragraph only if it is to be used
within the United States or any of its possessions
exclusively for purposes specified in subparagraph (B).
Rules similar to the rules of section 501(j) shall
apply for purposes of this paragraph.
(3) A post or organization of war veterans, or an
auxiliary unit or society of, or trust or foundation
for, any such post or organization--
(A) organized in the United States or any of
its possessions, and
(B) no part of the net earnings of which
inures to the benefit of any private
shareholder or individual.
(4) In the case of a contribution or gift by an
individual, a domestic fraternal society, order, or
association, operating under the lodge system, but only
if such contribution or gift is to be used exclusively
for religious, charitable, scientific, literary, or
educational purposes, or for the prevention of cruelty
to children or animals.
(5) A cemetery company owned and operated exclusively
for the benefit of its members, or any corporation
chartered solely for burial purposes as a cemetery
corporation and not permitted by its charter to engage
in any business not necessarily incident to that
purpose, if such company or corporation is not operated
for profit and no part of the net earnings of such
company or corporation inures to the benefit of any
private shareholder or individual.
For purposes of this section, the term ``charitable
contribution'' also means an amount treated under subsection
(g) as paid for the use of an organization described in
paragraph (2), (3), or (4).
(d) Carryovers of excess contributions.--
(1) Individuals.--
(A) In general.--In the case of an
individual, if the amount of charitable
contributions described in subsection (b)(1)(A)
payment of which is made within a taxable year
(hereinafter in this paragraph referred to as
the ``contribution year'') exceeds 50 percent
of the taxpayer's contribution base for such
year, such excess shall be treated as a
charitable contribution described in subsection
(b)(1)(A) paid in each of the 5 succeeding
taxable years in order of time, but, with
respect to any such succeeding taxable year,
only to the extent of the lesser of the two
following amounts:
(i) the amount by which 50 percent of
the taxpayer's contribution base for
such succeeding taxable year exceeds
the sum of the charitable contributions
described in subsection (b)(1)(A)
payment of which is made by the
taxpayer within such succeeding taxable
year (determined without regard to this
subparagraph) and the charitable
contributions described in subsection
(b)(1)(A) payment of which was made in
taxable years before the contribution
year which are treated under this
subparagraph as having been paid in
such succeeding taxable year; or
(ii) in the case of the first
succeeding taxable year, the amount of
such excess, and in the case of the
second, third, fourth, or fifth
succeeding taxable year, the portion of
such excess not treated under this
subparagraph as a charitable
contribution described in subsection
(b)(1)(A) paid in any taxable year
intervening between the contribution
year and such succeeding taxable year.
(B) Special rule for net operating loss
carryovers.--In applying subparagraph (A), the
excess determined under subparagraph (A) for
the contribution year shall be reduced to the
extent that such excess reduces taxable income
(as computed for purposes of the second
sentence of section 172(b)(2)) and increases
the net operating loss deduction for a taxable
year succeeding the contribution year.
(2) Corporations.--
(A) In general.--Any contribution made by a
corporation in a taxable year (hereinafter in
this paragraph referred to as the
``contribution year'') in excess of the amount
deductible for such year under subsection
(b)(2)(A) shall be deductible for each of the 5
succeeding taxable years in order of time, but
only to the extent of the lesser of the two
following amounts: (i) the excess of the
maximum amount deductible for such succeeding
taxable year under subsection (b)(2)(A) over
the sum of the contributions made in such year
plus the aggregate of the excess contributions
which were made in taxable years before the
contribution year and which are deductible
under this subparagraph for such succeeding
taxable year; or (ii) in the case of the first
succeeding taxable year, the amount of such
excess contribution, and in the case of the
second, third, fourth, or fifth succeeding
taxable year, the portion of such excess
contribution not deductible under this
subparagraph for any taxable year intervening
between the contribution year and such
succeeding taxable year.
(B) Special rule for net operating loss
carryovers.--For purposes of subparagraph (A),
the excess of--
(i) the contributions made by a
corporation in a taxable year to which
this section applies, over
(ii) the amount deductible in such
year under the limitation in subsection
(b)(2)(A),
shall be reduced to the extent that such excess
reduces taxable income (as computed for
purposes of the second sentence of section
172(b)(2)) and increases a net operating loss
carryover under section 172 to a succeeding
taxable year.
(e) Certain contributions of ordinary income and capital gain
property.--
(1) General rule.--The amount of any charitable
contribution of property otherwise taken into account
under this section shall be reduced by the sum of--
(A) the amount of gain which would not have
been long-term capital gain (determined without
regard to section 1221(b)(3)) if the property
contributed had been sold by the taxpayer at
its fair market value (determined at the time
of such contribution), and
(B) in the case of a charitable
contribution--
(i) of tangible personal property--
(I) if the use by the donee
is unrelated to the purpose or
function constituting the basis
for its exemption under section
501 (or, in the case of a
governmental unit, to any
purpose or function described
in subsection (c)), or
(II) which is applicable
property (as defined in
paragraph (7)(C), but without
regard to clause (ii) thereof)
which is sold, exchanged, or
otherwise disposed of by the
donee before the last day of
the taxable year in which the
contribution was made and with
respect to which the donee has
not made a certification in
accordance with paragraph
(7)(D),
(ii) to or for the use of a private
foundation (as defined in section
509(a)), other than a private
foundation described in subsection
(b)(1)(F),
(iii) of any patent, copyright (other
than a copyright described in section
1221(a)(3) or 1231(b)(1)(C)),
trademark, trade name, trade secret,
know-how, software (other than software
described in section 197(e)(3)(A)(i)),
or similar property, or applications or
registrations of such property, or
(iv) of any taxidermy property which
is contributed by the person who
prepared, stuffed, or mounted the
property or by any person who paid or
incurred the cost of such preparation,
stuffing, or mounting,
the amount of gain which would have been long-
term capital gain if the property contributed
had been sold by the taxpayer at its fair
market value (determined at the time of such
contribution).
For purposes of applying this paragraph (other than in
the case of gain to which section 617(d)(1), 1245(a),
1250(a), 1252(a), or 1254(a) applies), property which
is property used in the trade or business (as defined
in section 1231(b)) shall be treated as a capital
asset. For purposes of applying this paragraph in the
case of a charitable contribution of stock in an S
corporation, rules similar to the rules of section 751
shall apply in determining whether gain on such stock
would have been long-term capital gain if such stock
were sold by the taxpayer.
(2) Allocation of basis.--For purposes of paragraph
(1), in the case of a charitable contribution of less
than the taxpayer's entire interest in the property
contributed, the taxpayer's adjusted basis in such
property shall be allocated between the interest
contributed and any interest not contributed in
accordance with regulations prescribed by the
Secretary.
(3) Special rule for certain contributions of
inventory and other property.--
(A) Qualified contributions.--For purposes of
this paragraph, a qualified contribution shall
mean a charitable contribution of property
described in paragraph (1) or (2) of section
1221(a), by a corporation (other than a
corporation which is an S corporation) to an
organization which is described in section
501(c)(3) and is exempt under section 501(a)
(other than a private foundation, as defined in
section 509(a), which is not an operating
foundation, as defined in section 4942(j)(3)),
but only if--
(i) the use of the property by the
donee is related to the purpose or
function constituting the basis for its
exemption under section 501 and the
property is to be used by the donee
solely for the care of the ill, the
needy, or infants;
(ii) the property is not transferred
by the donee in exchange for money,
other property, or services;
(iii) the taxpayer receives from the
donee a written statement representing
that its use and disposition of the
property will be in accordance with the
provisions of clauses (i) and (ii); and
(iv) in the case where the property
is subject to regulation under the
Federal Food, Drug, and Cosmetic Act,
as amended, such property must fully
satisfy the applicable requirements of
such Act and regulations promulgated
thereunder on the date of transfer and
for one hundred and eighty days prior
thereto.
(B) Amount of reduction.--The reduction under
paragraph (1)(A) for any qualified contribution
(as defined in subparagraph (A)) shall be no
greater than the sum of--
(i) one-half of the amount computed
under paragraph (1)(A) (computed
without regard to this paragraph), and
(ii) the amount (if any) by which the
charitable contribution deduction under
this section for any qualified
contribution (computed by taking into
account the amount determined in clause
(i), but without regard to this clause)
exceeds twice the basis of such
property.
(C) Special rule for contributions of food
inventory.--
(i) General rule.--In the case of a
charitable contribution of food from
any trade or business of the taxpayer,
this paragraph shall be applied--
(I) without regard to whether
the contribution is made by a C
corporation, and
(II) only to food that is
apparently wholesome food.
(ii) Limitation.--The aggregate
amount of such contributions for any
taxable year which may be taken into
account under this section shall not
exceed--
(I) in the case of any
taxpayer other than a C
corporation, 15 percent of the
taxpayer's aggregate net income
for such taxable year from all
trades or businesses from which
such contributions were made
for such year, computed without
regard to this section, and
(II) in the case of a C
corporation, 15 percent of
taxable income (as defined in
subsection (b)(2)(D)).
(iii) Rules related to limitation.--
(I) Carryover.--If such
aggregate amount exceeds the
limitation imposed under clause
(ii), such excess shall be
treated (in a manner consistent
with the rules of subsection
(d)) as a charitable
contribution described in
clause (i) in each of the 5
succeeding taxable years in
order of time.
(II) Coordination with
overall corporate limitation.--
In the case of any charitable
contribution which is allowable
after the application of clause
(ii)(II), subsection (b)(2)(A)
shall not apply to such
contribution, but the
limitation imposed by such
subsection shall be reduced
(but not below zero) by the
aggregate amount of such
contributions. For purposes of
subsection (b)(2)(B), such
contributions shall be treated
as allowable under subsection
(b)(2)(A).
(iv) Determination of basis for
certain taxpayers.--If a taxpayer--
(I) does not account for
inventories under section 471,
and
(II) is not required to
capitalize indirect costs under
section 263A,
the taxpayer may elect, solely for purposes of
subparagraph (B), to treat the basis of any
apparently wholesome food as being equal to 25
percent of the fair market value of such food.
(v) Determination of fair market
value.--In the case of any such
contribution of apparently wholesome
food which cannot or will not be sold
solely by reason of internal standards
of the taxpayer, lack of market, or
similar circumstances, or by reason of
being produced by the taxpayer
exclusively for the purposes of
transferring the food to an
organization described in subparagraph
(A), the fair market value of such
contribution shall be determined--
(I) without regard to such
internal standards, such lack
of market, such circumstances,
or such exclusive purpose, and
(II) by taking into account
the price at which the same or
substantially the same food
items (as to both type and
quality) are sold by the
taxpayer at the time of the
contribution (or, if not so
sold at such time, in the
recent past).
(vi) Apparently wholesome food.--For
purposes of this subparagraph, the term
``apparently wholesome food'' has the
meaning given to such term by section
22(b)(2) of the Bill Emerson Good
Samaritan Food Donation Act (42 U.S.C.
1791(b)(2)), as in effect on the date
of the enactment of this subparagraph.
(D) This paragraph shall not apply to so much
of the amount of the gain described in
paragraph (1)(A) which would be long-term
capital gain but for the application of
sections 617, 1245, 1250, or 1252.
(4) Special rule for contributions of scientific
property used for research.--
(A) Limit on reduction.--In the case of a
qualified research contribution, the reduction
under paragraph (1)(A) shall be no greater than
the amount determined under paragraph (3)(B).
(B) Qualified research contributions.--For
purposes of this paragraph, the term
``qualified research contribution'' means a
charitable contribution by a corporation of
tangible personal property described in
paragraph (1) of section 1221(a), but only if--
(i) the contribution is to an
organization described in subparagraph
(A) or subparagraph (B) of section
41(e)(6),
(ii) the property is constructed or
assembled by the taxpayer,
(iii) the contribution is made not
later than 2 years after the date the
construction or assembly of the
property is substantially completed,
(iv) the original use of the property
is by the donee,
(v) the property is scientific
equipment or apparatus substantially
all of the use of which by the donee is
for research or experimentation (within
the meaning of section 174), or for
research training, in the United States
in physical or biological sciences,
(vi) the property is not transferred
by the donee in exchange for money,
other property, or services, and
(vii) the taxpayer receives from the
donee a written statement representing
that its use and disposition of the
property will be in accordance with the
provisions of clauses (v) and (vi).
(C) Construction of property by taxpayer.--
For purposes of this paragraph, property shall
be treated as constructed by the taxpayer only
if the cost of the parts used in the
construction of such property (other than parts
manufactured by the taxpayer or a related
person) do not exceed 50 percent of the
taxpayer's basis in such property.
(D) Corporation.--For purposes of this
paragraph, the term ``corporation'' shall not
include--
(i) an S corporation,
(ii) a personal holding company (as
defined in section 542), and
(iii) a service organization (as
defined in section 414(m)(3)).
(5) Special rule for contributions of stock for which
market quotations are readily available.--
(A) In general.--Subparagraph (B)(ii) of
paragraph (1) shall not apply to any
contribution of qualified appreciated stock.
(B) Qualified appreciated stock.--Except as
provided in subparagraph (C), for purposes of
this paragraph, the term ``qualified
appreciated stock'' means any stock of a
corporation--
(i) for which (as of the date of the
contribution) market quotations are
readily available on an established
securities market, and
(ii) which is capital gain property
(as defined in subsection
(b)(1)(C)(iv)).
(C) Donor may not contribute more than 10
percent of stock of corporation.--
(i) In general.--In the case of any
donor, the term ``qualified appreciated
stock'' shall not include any stock of
a corporation contributed by the donor
in a contribution to which paragraph
(1)(B)(ii) applies (determined without
regard to this paragraph) to the extent
that the amount of the stock so
contributed (when increased by the
aggregate amount of all prior such
contributions by the donor of stock in
such corporation) exceeds 10 percent
(in value) of all of the outstanding
stock of such corporation.
(ii) Special rule.--For purposes of
clause (i), an individual shall be
treated as making all contributions
made by any member of his family (as
defined in section 267(c)(4)).
(7) Recapture of deduction on certain dispositions of
exempt use property.--
(A) In general.--In the case of an applicable
disposition of applicable property, there shall
be included in the income of the donor of such
property for the taxable year of such donor in
which the applicable disposition occurs an
amount equal to the excess (if any) of--
(i) the amount of the deduction
allowed to the donor under this section
with respect to such property, over
(ii) the donor's basis in such
property at the time such property was
contributed.
(B) Applicable disposition.--For purposes of
this paragraph, the term ``applicable
disposition'' means any sale, exchange, or
other disposition by the donee of applicable
property--
(i) after the last day of the taxable
year of the donor in which such
property was contributed, and
(ii) before the last day of the 3-
year period beginning on the date of
the contribution of such property,
unless the donee makes a certification in
accordance with subparagraph (D).
(C) Applicable property.--For purposes of
this paragraph, the term ``applicable
property'' means charitable deduction property
(as defined in section 6050L(a)(2)(A))--
(i) which is tangible personal
property the use of which is identified
by the donee as related to the purpose
or function constituting the basis of
the donee's exemption under section
501, and
(ii) for which a deduction in excess
of the donor's basis is allowed.
(D) Certification.--A certification meets the
requirements of this subparagraph if it is a
written statement which is signed under penalty
of perjury by an officer of the donee
organization and--
(i) which--
(I) certifies that the use of
the property by the donee was
substantial and related to the
purpose or function
constituting the basis for the
donee's exemption under section
501, and
(II) describes how the
property was used and how such
use furthered such purpose or
function, or
(ii) which--
(I) states the intended use
of the property by the donee at
the time of the contribution,
and
(II) certifies that such
intended use has become
impossible or infeasible to
implement.
(f) Disallowance of deduction in certain cases and special
rules.--
(1) In general.--No deduction shall be allowed under
this section for a contribution to or for the use of an
organization or trust described in section 508(d) or
4948(c)(4) subject to the conditions specified in such
sections.
(2) Contributions of property placed in trust.--
(A) Remainder interest.--In the case of
property transferred in trust, no deduction
shall be allowed under this section for the
value of a contribution of a remainder interest
unless the trust is a charitable remainder
annuity trust or a charitable remainder
unitrust (described in section 664), or a
pooled income fund (described in section
642(c)(5)).
(B) Income interests, etc..--No deduction
shall be allowed under this section for the
value of any interest in property (other than a
remainder interest) transferred in trust unless
the interest is in the form of a guaranteed
annuity or the trust instrument specifies that
the interest is a fixed percentage distributed
yearly of the fair market value of the trust
property (to be determined yearly) and the
grantor is treated as the owner of such
interest for purposes of applying section 671.
If the donor ceases to be treated as the owner
of such an interest for purposes of applying
section 671, at the time the donor ceases to be
so treated, the donor shall for purposes of
this chapter be considered as having received
an amount of income equal to the amount of any
deduction he received under this section for
the contribution reduced by the discounted
value of all amounts of income earned by the
trust and taxable to him before the time at
which he ceases to be treated as the owner of
the interest. Such amounts of income shall be
discounted to the date of the contribution. The
Secretary shall prescribe such regulations as
may be necessary to carry out the purposes of
this subparagraph.
(C) Denial of deduction in case of payments
by certain trusts.--In any case in which a
deduction is allowed under this section for the
value of an interest in property described in
subparagraph (B), transferred in trust, no
deduction shall be allowed under this section
to the grantor or any other person for the
amount of any contribution made by the trust
with respect to such interest.
(D) Exception.--This paragraph shall not
apply in a case in which the value of all
interests in property transferred in trust are
deductible under subsection (a).
(3) Denial of deduction in case of certain
contributions of partial interests in property.--
(A) In general.--In the case of a
contribution (not made by a transfer in trust)
of an interest in property which consists of
less than the taxpayer's entire interest in
such property, a deduction shall be allowed
under this section only to the extent that the
value of the interest contributed would be
allowable as a deduction under this section if
such interest had been transferred in trust.
For purposes of this subparagraph, a
contribution by a taxpayer of the right to use
property shall be treated as a contribution of
less than the taxpayer's entire interest in
such property.
(B) Exceptions.--Subparagraph (A) shall not
apply to--
(i) a contribution of a remainder
interest in a personal residence or
farm,
(ii) a contribution of an undivided
portion of the taxpayer's entire
interest in property, and
(iii) a qualified conservation
contribution.
(4) Valuation of remainder interest in real
property.--For purposes of this section, in determining
the value of a remainder interest in real property,
depreciation (computed on the straight line method) and
depletion of such property shall be taken into account,
and such value shall be discounted at a rate of 6
percent per annum, except that the Secretary may
prescribe a different rate.
(5) Reduction for certain interest.--If, in
connection with any charitable contribution, a
liability is assumed by the recipient or by any other
person, or if a charitable contribution is of property
which is subject to a liability, then, to the extent
necessary to avoid the duplication of amounts, the
amount taken into account for purposes of this section
as the amount of the charitable contribution--
(A) shall be reduced for interest (i) which
has been paid (or is to be paid) by the
taxpayer, (ii) which is attributable to the
liability, and (iii) which is attributable to
any period after the making of the
contribution, and
(B) in the case of a bond, shall be further
reduced for interest (i) which has been paid
(or is to be paid) by the taxpayer on
indebtedness incurred or continued to purchase
or carry such bond, and (ii) which is
attributable to any period before the making of
the contribution.
The reduction pursuant to subparagraph (B) shall not
exceed the interest (including interest equivalent) on
the bond which is attributable to any period before the
making of the contribution and which is not (under the
taxpayer's method of accounting) includible in the
gross income of the taxpayer for any taxable year. For
purposes of this paragraph, the term ``bond'' means any
bond, debenture, note, or certificate or other evidence
of indebtedness.
(6) Deductions for out-of-pocket expenditures.--No
deduction shall be allowed under this section for an
out-of-pocket expenditure made by any person on behalf
of an organization described in subsection (c) (other
than an organization described in section 501(h)(5)
(relating to churches, etc.)) if the expenditure is
made for the purpose of influencing legislation (within
the meaning of section 501(c)(3)).
(7) Reformations to comply with paragraph (2).--
(A) In general.--A deduction shall be allowed
under subsection (a) in respect of any
qualified reformation (within the meaning of
section 2055(e)(3)(B)).
(B) Rules similar to section 2055(e)(3) to
apply.--For purposes of this paragraph, rules
similar to the rules of section 2055(e)(3)
shall apply.
(8) Substantiation requirement for certain
contributions.--
(A) General rule.--No deduction shall be
allowed under subsection (a) for any
contribution of $250 or more unless the
taxpayer substantiates the contribution by a
contemporaneous written acknowledgment of the
contribution by the donee organization that
meets the requirements of subparagraph (B).
(B) Content of acknowledgement.--An
acknowledgement meets the requirements of this
subparagraph if it includes the following
information:
(i) The amount of cash and a
description (but not value) of any
property other than cash contributed.
(ii) Whether the donee organization
provided any goods or services in
consideration, in whole or in part, for
any property described in clause (i).
(iii) A description and good faith
estimate of the value of any goods or
services referred to in clause (ii) or,
if such goods or services consist
solely of intangible religious
benefits, a statement to that effect.
For purposes of this subparagraph, the term
``intangible religious benefit'' means any
intangible religious benefit which is provided
by an organization organized exclusively for
religious purposes and which generally is not
sold in a commercial transaction outside the
donative context.
(C) Contemporaneous.--For purposes of
subparagraph (A), an acknowledgment shall be
considered to be contemporaneous if the
taxpayer obtains the acknowledgment on or
before the earlier of--
(i) the date on which the taxpayer
files a return for the taxable year in
which the contribution was made, or
(ii) the due date (including
extensions) for filing such return.
(D) Regulations.--The Secretary shall
prescribe such regulations as may be necessary
or appropriate to carry out the purposes of
this paragraph, including regulations that may
provide that some or all of the requirements of
this paragraph do not apply in appropriate
cases.
(9) Denial of deduction where contribution for
lobbying activities.--No deduction shall be allowed
under this section for a contribution to an
organization which conducts activities to which section
162(e)(1) applies on matters of direct financial
interest to the donor's trade or business, if a
principal purpose of the contribution was to avoid
Federal income tax by securing a deduction for such
activities under this section which would be disallowed
by reason of section 162(e) if the donor had conducted
such activities directly. No deduction shall be allowed
under section 162(a) for any amount for which a
deduction is disallowed under the preceding sentence.
(10) Split-dollar life insurance, annuity, and
endowment contracts.--
(A) In general.--Nothing in this section or
in section 545(b)(2), 642(c), 2055, 2106(a)(2),
or 2522 shall be construed to allow a
deduction, and no deduction shall be allowed,
for any transfer to or for the use of an
organization described in subsection (c) if in
connection with such transfer--
(i) the organization directly or
indirectly pays, or has previously
paid, any premium on any personal
benefit contract with respect to the
transferor, or
(ii) there is an understanding or
expectation that any person will
directly or indirectly pay any premium
on any personal benefit contract with
respect to the transferor.
(B) Personal benefit contract.--For purposes
of subparagraph (A), the term ``personal
benefit contract'' means, with respect to the
transferor, any life insurance, annuity, or
endowment contract if any direct or indirect
beneficiary under such contract is the
transferor, any member of the transferor's
family, or any other person (other than an
organization described in subsection (c))
designated by the transferor.
(C) Application to charitable remainder
trusts.--In the case of a transfer to a trust
referred to in subparagraph (E), references in
subparagraphs (A) and (F) to an organization
described in subsection (c) shall be treated as
a reference to such trust.
(D) Exception for certain annuity
contracts.--If, in connection with a transfer
to or for the use of an organization described
in subsection (c), such organization incurs an
obligation to pay a charitable gift annuity (as
defined in section 501(m)) and such
organization purchases any annuity contract to
fund such obligation, persons receiving
payments under the charitable gift annuity
shall not be treated for purposes of
subparagraph (B) as indirect beneficiaries
under such contract if--
(i) such organization possesses all
of the incidents of ownership under
such contract,
(ii) such organization is entitled to
all the payments under such contract,
and
(iii) the timing and amount of
payments under such contract are
substantially the same as the timing
and amount of payments to each such
person under such obligation (as such
obligation is in effect at the time of
such transfer).
(E) Exception for certain contracts held by
charitable remainder trusts.--A person shall
not be treated for purposes of subparagraph (B)
as an indirect beneficiary under any life
insurance, annuity, or endowment contract held
by a charitable remainder annuity trust or a
charitable remainder unitrust (as defined in
section 664(d)) solely by reason of being
entitled to any payment referred to in
paragraph (1)(A) or (2)(A) of section 664(d)
if--
(i) such trust possesses all of the
incidents of ownership under such
contract, and
(ii) such trust is entitled to all
the payments under such contract.
(F) Excise tax on premiums paid.--
(i) In general.--There is hereby
imposed on any organization described
in subsection (c) an excise tax equal
to the premiums paid by such
organization on any life insurance,
annuity, or endowment contract if the
payment of premiums on such contract is
in connection with a transfer for which
a deduction is not allowable under
subparagraph (A), determined without
regard to when such transfer is made.
(ii) Payments by other persons.--For
purposes of clause (i), payments made
by any other person pursuant to an
understanding or expectation referred
to in subparagraph (A) shall be treated
as made by the organization.
(iii) Reporting.--Any organization on
which tax is imposed by clause (i) with
respect to any premium shall file an
annual return which includes--
(I) the amount of such
premiums paid during the year
and the name and TIN of each
beneficiary under the contract
to which the premium relates,
and
(II) such other information
as the Secretary may require.
The penalties applicable to returns required
under section 6033 shall apply to returns
required under this clause. Returns required
under this clause shall be furnished at such
time and in such manner as the Secretary shall
by forms or regulations require.
(iv) Certain rules to apply.--The tax
imposed by this subparagraph shall be
treated as imposed by chapter 42 for
purposes of this title other than
subchapter B of chapter 42.
(G) Special rule where State requires
specification of charitable gift annuitant in
contract.--In the case of an obligation to pay
a charitable gift annuity referred to in
subparagraph (D) which is entered into under
the laws of a State which requires, in order
for the charitable gift annuity to be exempt
from insurance regulation by such State, that
each beneficiary under the charitable gift
annuity be named as a beneficiary under an
annuity contract issued by an insurance company
authorized to transact business in such State,
the requirements of clauses (i) and (ii) of
subparagraph (D) shall be treated as met if--
(i) such State law requirement was in
effect on February 8, 1999,
(ii) each such beneficiary under the
charitable gift annuity is a bona fide
resident of such State at the time the
obligation to pay a charitable gift
annuity is entered into, and
(iii) the only persons entitled to
payments under such contract are
persons entitled to payments as
beneficiaries under such obligation on
the date such obligation is entered
into.
(H) Member of family.--For purposes of this
paragraph, an individual's family consists of
the individual's grandparents, the grandparents
of such individual's spouse, the lineal
descendants of such grandparents, and any
spouse of such a lineal descendant.
(I) Regulations.--The Secretary shall
prescribe such regulations as may be necessary
or appropriate to carry out the purposes of
this paragraph, including regulations to
prevent the avoidance of such purposes.
(11) Qualified appraisal and other documentation for
certain contributions.--
(A) In general.--
(i) Denial of deduction.--In the case
of an individual, partnership, or
corporation, no deduction shall be
allowed under subsection (a) for any
contribution of property for which a
deduction of more than $500 is claimed
unless such person meets the
requirements of subparagraphs (B), (C),
and (D), as the case may be, with
respect to such contribution.
(ii) Exceptions.--
(I) Readily valued
property.--Subparagraphs (C)
and (D) shall not apply to
cash, property described in
subsection (e)(1)(B)(iii) or
section 1221(a)(1), publicly
traded securities (as defined
in section 6050L(a)(2)(B)), and
any qualified vehicle described
in paragraph (12)(A)(ii) for
which an acknowledgement under
paragraph (12)(B)(iii) is
provided.
(II) Reasonable cause.--
Clause (i) shall not apply if
it is shown that the failure to
meet such requirements is due
to reasonable cause and not to
willful neglect.
(B) Property description for contributions of
more than $500.--In the case of contributions
of property for which a deduction of more than
$500 is claimed, the requirements of this
subparagraph are met if the individual,
partnership or corporation includes with the
return for the taxable year in which the
contribution is made a description of such
property and such other information as the
Secretary may require. The requirements of this
subparagraph shall not apply to a C corporation
which is not a personal service corporation or
a closely held C corporation.
(C) Qualified appraisal for contributions of
more than $5,000.--In the case of contributions
of property for which a deduction of more than
$5,000 is claimed, the requirements of this
subparagraph are met if the individual,
partnership, or corporation obtains a qualified
appraisal of such property and attaches to the
return for the taxable year in which such
contribution is made such information regarding
such property and such appraisal as the
Secretary may require.
(D) Substantiation for contributions of more
than $500,000.--In the case of contributions of
property for which a deduction of more than
$500,000 is claimed, the requirements of this
subparagraph are met if the individual,
partnership, or corporation attaches to the
return for the taxable year a qualified
appraisal of such property.
(E) Qualified appraisal and appraiser.--For
purposes of this paragraph--
(i) Qualified appraisal.--The term
``qualified appraisal'' means, with
respect to any property, an appraisal
of such property which--
(I) is treated for purposes
of this paragraph as a
qualified appraisal under
regulations or other guidance
prescribed by the Secretary,
and
(II) is conducted by a
qualified appraiser in
accordance with generally
accepted appraisal standards
and any regulations or other
guidance prescribed under
subclause (I).
(ii) Qualified appraiser.--Except as
provided in clause (iii), the term
``qualified appraiser'' means an
individual who--
(I) has earned an appraisal
designation from a recognized
professional appraiser
organization or has otherwise
met minimum education and
experience requirements set
forth in regulations prescribed
by the Secretary,
(II) regularly performs
appraisals for which the
individual receives
compensation, and
(III) meets such other
requirements as may be
prescribed by the Secretary in
regulations or other guidance.
(iii) Specific appraisals.--An
individual shall not be treated as a
qualified appraiser with respect to any
specific appraisal unless--
(I) the individual
demonstrates verifiable
education and experience in
valuing the type of property
subject to the appraisal, and
(II) the individual has not
been prohibited from practicing
before the Internal Revenue
Service by the Secretary under
section 330(c) of title 31,
United States Code, at any time
during the 3-year period ending
on the date of the appraisal.
(F) Aggregation of similar items of
property.--For purposes of determining
thresholds under this paragraph, property and
all similar items of property donated to 1 or
more donees shall be treated as 1 property.
(G) Special rule for pass-thru entities.--In
the case of a partnership or S corporation,
this paragraph shall be applied at the entity
level, except that the deduction shall be
denied at the partner or shareholder level.
(H) Regulations.--The Secretary may prescribe
such regulations as may be necessary or
appropriate to carry out the purposes of this
paragraph, including regulations that may
provide that some or all of the requirements of
this paragraph do not apply in appropriate
cases.
(12) Contributions of used motor vehicles, boats, and
airplanes.--
(A) In general.--In the case of a
contribution of a qualified vehicle the claimed
value of which exceeds $500--
(i) paragraph (8) shall not apply and
no deduction shall be allowed under
subsection (a) for such contribution
unless the taxpayer substantiates the
contribution by a contemporaneous
written acknowledgement of the
contribution by the donee organization
that meets the requirements of
subparagraph (B) and includes the
acknowledgement with the taxpayer's
return of tax which includes the
deduction, and
(ii) if the organization sells the
vehicle without any significant
intervening use or material improvement
of such vehicle by the organization,
the amount of the deduction allowed
under subsection (a) shall not exceed
the gross proceeds received from such
sale.
(B) Content of acknowledgement.--An
acknowledgement meets the requirements of this
subparagraph if it includes the following
information:
(i) The name and taxpayer
identification number of the donor.
(ii) The vehicle identification
number or similar number.
(iii) In the case of a qualified
vehicle to which subparagraph (A)(ii)
applies--
(I) a certification that the
vehicle was sold in an arm's
length transaction between
unrelated parties,
(II) the gross proceeds from
the sale, and
(III) a statement that the
deductible amount may not
exceed the amount of such gross
proceeds.
(iv) In the case of a qualified
vehicle to which subparagraph (A)(ii)
does not apply--
(I) a certification of the
intended use or material
improvement of the vehicle and
the intended duration of such
use, and
(II) a certification that the
vehicle would not be
transferred in exchange for
money, other property, or
services before completion of
such use or improvement.
(v) Whether the donee organization
provided any goods or services in
consideration, in whole or in part, for
the qualified vehicle.
(vi) A description and good faith
estimate of the value of any goods or
services referred to in clause (v) or,
if such goods or services consist
solely of intangible religious benefits
(as defined in paragraph (8)(B)), a
statement to that effect.
(C) Contemporaneous.--For purposes of
subparagraph (A), an acknowledgement shall be
considered to be contemporaneous if the donee
organization provides it within 30 days of--
(i) the sale of the qualified
vehicle, or
(ii) in the case of an
acknowledgement including a
certification described in subparagraph
(B)(iv), the contribution of the
qualified vehicle.
(D) Information to Secretary.--A donee
organization required to provide an
acknowledgement under this paragraph shall
provide to the Secretary the information
contained in the acknowledgement. Such
information shall be provided at such time and
in such manner as the Secretary may prescribe.
(E) Qualified vehicle.--For purposes of this
paragraph, the term ``qualified vehicle'' means
any--
(i) motor vehicle manufactured
primarily for use on public streets,
roads, and highways,
(ii) boat, or
(iii) airplane.
Such term shall not include any property which
is described in section 1221(a)(1).
(F) Regulations or other guidance.--The
Secretary shall prescribe such regulations or
other guidance as may be necessary to carry out
the purposes of this paragraph. The Secretary
may prescribe regulations or other guidance
which exempts sales by the donee organization
which are in direct furtherance of such
organization's charitable purpose from the
requirements of subparagraphs (A)(ii) and
(B)(iv)(II).
(13) Contributions of certain interests in buildings
located in registered historic districts.--
(A) In general.--No deduction shall be
allowed with respect to any contribution
described in subparagraph (B) unless the
taxpayer includes with the return for the
taxable year of the contribution a $500 filing
fee.
(B) Contribution described.--A contribution
is described in this subparagraph if such
contribution is a qualified conservation
contribution (as defined in subsection (h))
which is a restriction with respect to the
exterior of a building described in subsection
(h)(4)(C)(ii) and for which a deduction is
claimed in excess of $10,000.
(C) Dedication of fee.--Any fee collected
under this paragraph shall be used for the
enforcement of the provisions of subsection
(h).
(14) Reduction for amounts attributable to
rehabilitation credit.--In the case of any qualified
conservation contribution (as defined in subsection
(h)), the amount of the deduction allowed under this
section shall be reduced by an amount which bears the
same ratio to the fair market value of the contribution
as--
(A) the sum of the credits allowed to the
taxpayer under section 47 for the 5 preceding
taxable years with respect to any building
which is a part of such contribution, bears to
(B) the fair market value of the building on
the date of the contribution.
(15) Special rule for taxidermy property.--
(A) Basis.--For purposes of this section and
notwithstanding section 1012, in the case of a
charitable contribution of taxidermy property
which is made by the person who prepared,
stuffed, or mounted the property or by any
person who paid or incurred the cost of such
preparation, stuffing, or mounting, only the
cost of the preparing, stuffing, or mounting
shall be included in the basis of such
property.
(B) Taxidermy property.--For purposes of this
section, the term ``taxidermy property'' means
any work of art which--
(i) is the reproduction or
preservation of an animal, in whole or
in part,
(ii) is prepared, stuffed, or mounted
for purposes of recreating one or more
characteristics of such animal, and
(iii) contains a part of the body of
the dead animal.
(16) Contributions of clothing and household items.--
(A) In general.--In the case of an
individual, partnership, or corporation, no
deduction shall be allowed under subsection (a)
for any contribution of clothing or a household
item unless such clothing or household item is
in good used condition or better.
(B) Items of minimal value.--Notwithstanding
subparagraph (A), the Secretary may by
regulation deny a deduction under subsection
(a) for any contribution of clothing or a
household item which has minimal monetary
value.
(C) Exception for certain property.--
Subparagraphs (A) and (B) shall not apply to
any contribution of a single item of clothing
or a household item for which a deduction of
more than $500 is claimed if the taxpayer
includes with the taxpayer's return a qualified
appraisal with respect to the property.
(D) Household items.--For purposes of this
paragraph--
(i) In general.--The term ``household
items'' includes furniture,
furnishings, electronics, appliances,
linens, and other similar items.
(ii) Excluded items.--Such term does
not include--
(I) food,
(II) paintings, antiques, and
other objects of art,
(III) jewelry and gems, and
(IV) collections.
(E) Special rule for pass-thru entities.--In
the case of a partnership or S corporation,
this paragraph shall be applied at the entity
level, except that the deduction shall be
denied at the partner or shareholder level.
(17) Recordkeeping.--No deduction shall be allowed
under subsection (a) for any contribution of a cash,
check, or other monetary gift unless the donor
maintains as a record of such contribution a bank
record or a written communication from the donee
showing the name of the donee organization, the date of
the contribution, and the amount of the contribution.
(18) Contributions to donor advised funds.--A
deduction otherwise allowed under subsection (a) for
any contribution to a donor advised fund (as defined in
section 4966(d)(2)) shall only be allowed if--
(A) the sponsoring organization (as defined
in section 4966(d)(1)) with respect to such
donor advised fund is not--
(i) described in paragraph (3), (4),
or (5) of subsection (c), or
(ii) a type III supporting
organization (as defined in section
4943(f)(5)(A)) which is not a
functionally integrated type III
supporting organization (as defined in
section 4943(f)(5)(B)), and
(B) the taxpayer obtains a contemporaneous
written acknowledgment (determined under rules
similar to the rules of paragraph (8)(C)) from
the sponsoring organization (as so defined) of
such donor advised fund that such organization
has exclusive legal control over the assets
contributed.
(g) Amounts paid to maintain certain students as members of
taxpayer's household.--
(1) In general.--Subject to the limitations provided
by paragraph (2), amounts paid by the taxpayer to
maintain an individual (other than a dependent, as
defined in section 152 (determined without regard to
subsections (b)(1), (b)(2), and (d)(1)(B) thereof), or
a relative of the taxpayer) as a member of his
household during the period that such individual is--
(A) a member of the taxpayer's household
under a written agreement between the taxpayer
and an organization described in paragraph (2),
(3), or (4) of subsection (c) to implement a
program of the organization to provide
educational opportunities for pupils or
students in private homes, and
(B) a full-time pupil or student in the
twelfth or any lower grade at an educational
organization described in section
170(b)(1)(A)(ii) located in the United States,
shall be treated as amounts paid for the use of the
organization.
(2) Limitations.--
(A) Amount.--Paragraph (1) shall apply to
amounts paid within the taxable year only to
the extent that such amounts do not exceed $50
multiplied by the number of full calendar
months during the taxable year which fall
within the period described in paragraph (1).
For purposes of the preceding sentence, if 15
or more days of a calendar month fall within
such period such month shall be considered as a
full calendar month.
(B) Compensation or reimbursement.--Paragraph
(1) shall not apply to any amount paid by the
taxpayer within the taxable year if the
taxpayer receives any money or other property
as compensation or reimbursement for
maintaining the individual in his household
during the period described in paragraph (1).
(3) Relative defined.--For purposes of paragraph (1),
the term ``relative of the taxpayer'' means an
individual who, with respect to the taxpayer, bears any
of the relationships described in subparagraphs (A)
through (G) of section 152(d)(2).
(4) No other amount allowed as deduction.--No
deduction shall be allowed under subsection (a) for any
amount paid by a taxpayer to maintain an individual as
a member of his household under a program described in
paragraph (1)(A) except as provided in this subsection.
(h) Qualified conservation contribution.--
(1) In general.--For purposes of subsection
(f)(3)(B)(iii), the term ``qualified conservation
contribution'' means a contribution--
(A) of a qualified real property interest,
(B) to a qualified organization,
(C) exclusively for conservation purposes.
(2) Qualified real property interest.--For purposes
of this subsection, the term ``qualified real property
interest'' means any of the following interests in real
property:
(A) the entire interest of the donor other
than a qualified mineral interest,
(B) a remainder interest, and
(C) a restriction (granted in perpetuity) on
the use which may be made of the real property.
(3) Qualified organization.--For purposes of
paragraph (1), the term ``qualified organization''
means an organization which--
(A) is described in clause (v) or (vi) of
subsection (b)(1)(A), or
(B) is described in section 501(c)(3) and--
(i) meets the requirements of section
509(a)(2), or
(ii) meets the requirements of
section 509(a)(3) and is controlled by
an organization described in
subparagraph (A) or in clause (i) of
this subparagraph.
(4) Conservation purpose defined.--
(A) In general.--For purposes of this
subsection, the term ``conservation purpose''
means--
(i) the preservation of land areas
for outdoor recreation by, or the
education of, the general public,
(ii) the protection of a relatively
natural habitat of fish, wildlife, or
plants, or similar ecosystem,
(iii) the preservation of open space
(including farmland and forest land)
where such preservation is--
(I) for the scenic enjoyment
of the general public, or
(II) pursuant to a clearly
delineated Federal, State, or
local governmental conservation
policy,
and will yield a significant public benefit,
or
(iv) the preservation of an
historically important land area or a
certified historic structure.
(B) Special rules with respect to buildings
in registered historic districts.--In the case
of any contribution of a qualified real
property interest which is a restriction with
respect to the exterior of a building described
in subparagraph (C)(ii), such contribution
shall not be considered to be exclusively for
conservation purposes unless--
(i) such interest--
(I) includes a restriction
which preserves the entire
exterior of the building
(including the front, sides,
rear, and height of the
building), and
(II) prohibits any change in
the exterior of the building
which is inconsistent with the
historical character of such
exterior,
(ii) the donor and donee enter into a
written agreement certifying, under
penalty of perjury, that the donee--
(I) is a qualified
organization (as defined in
paragraph (3)) with a purpose
of environmental protection,
land conservation, open space
preservation, or historic
preservation, and
(II) has the resources to
manage and enforce the
restriction and a commitment to
do so, and
(iii) in the case of any contribution
made in a taxable year beginning after
the date of the enactment of this
subparagraph, the taxpayer includes
with the taxpayer's return for the
taxable year of the contribution--
(I) a qualified appraisal
(within the meaning of
subsection (f)(11)(E)) of the
qualified property interest,
(II) photographs of the
entire exterior of the
building, and
(III) a description of all
restrictions on the development
of the building.
(C) Certified historic structure.--For
purposes of subparagraph (A)(iv), the term
``certified historic structure'' means--
(i) any building, structure, or land
area which is listed in the National
Register, or
(ii) any building which is located in
a registered historic district (as
defined in section 47(c)(3)(B)) and is
certified by the Secretary of the
Interior to the Secretary as being of
historic significance to the district.
A building, structure, or land area satisfies the
preceding sentence if it satisfies such sentence either
at the time of the transfer or on the due date
(including extensions) for filing the transferor's
return under this chapter for the taxable year in which
the transfer is made.
(5) Exclusively for conservation purposes.--For
purposes of this subsection--
(A) Conservation purpose must be protected.--
A contribution shall not be treated as
exclusively for conservation purposes unless
the conservation purpose is protected in
perpetuity.
(B) No surface mining permitted.--
(i) In general.--Except as provided
in clause (ii), in the case of a
contribution of any interest where
there is a retention of a qualified
mineral interest, subparagraph (A)
shall not be treated as met if at any
time there may be extraction or removal
of minerals by any surface mining
method.
(ii) Special rule.--With respect to
any contribution of property in which
the ownership of the surface estate and
mineral interests has been and remains
separated, subparagraph (A) shall be
treated as met if the probability of
surface mining occurring on such
property is so remote as to be
negligible.
(6) Qualified mineral interest.--For purposes of this
subsection, the term ``qualified mineral interest''
means--
(A) subsurface oil, gas, or other minerals,
and
(B) the right to access to such minerals.
(i) Standard mileage rate for use of passenger automobile.--
For purposes of computing the deduction under this section for
use of a passenger automobile, the standard mileage rate shall
be 14 cents per mile.
(j) Denial of deduction for certain travel expenses.--No
deduction shall be allowed under this section for traveling
expenses (including amounts expended for meals and lodging)
while away from home, whether paid directly or by
reimbursement, unless there is no significant element of
personal pleasure, recreation, or vacation in such travel.
(l) Treatment of certain amounts paid to or for the benefit
of institutions of higher education.--
(1) In general.--No deduction shall be allowed under
this section for any amount described in paragraph (2).
(2) Amount described.--For purposes of paragraph (1),
an amount is described in this paragraph if--
(A) the amount is paid by the taxpayer to or
for the benefit of an educational
organization--
(i) which is described in subsection
(b)(1)(A)(ii), and
(ii) which is an institution of
higher education (as defined in section
3304(f)), and
(B) the taxpayer receives (directly or
indirectly) as a result of paying such amount
the right to purchase tickets for seating at an
athletic event in an athletic stadium of such
institution.
If any portion of a payment is for the purchase of such
tickets, such portion and the remaining portion (if
any) of such payment shall be treated as separate
amounts for purposes of this subsection.
(m) Certain donee income from intellectual property treated
as an additional charitable contribution.--
(1) Treatment as additional contribution.--In the
case of a taxpayer who makes a qualified intellectual
property contribution, the deduction allowed under
subsection (a) for each taxable year of the taxpayer
ending on or after the date of such contribution shall
be increased (subject to the limitations under
subsection (b)) by the applicable percentage of
qualified donee income with respect to such
contribution which is properly allocable to such year
under this subsection.
(2) Reduction in additional deductions to extent of
initial deduction.--With respect to any qualified
intellectual property contribution, the deduction
allowed under subsection (a) shall be increased under
paragraph (1) only to the extent that the aggregate
amount of such increases with respect to such
contribution exceed the amount allowed as a deduction
under subsection (a) with respect to such contribution
determined without regard to this subsection.
(3) Qualified donee income.--For purposes of this
subsection, the term ``qualified donee income'' means
any net income received by or accrued to the donee
which is properly allocable to the qualified
intellectual property.
(4) Allocation of qualified donee income to taxable
years of donor.--For purposes of this subsection,
qualified donee income shall be treated as properly
allocable to a taxable year of the donor if such income
is received by or accrued to the donee for the taxable
year of the donee which ends within or with such
taxable year of the donor.
(5) 10-year limitation.--Income shall not be treated
as properly allocable to qualified intellectual
property for purposes of this subsection if such income
is received by or accrued to the donee after the 10-
year period beginning on the date of the contribution
of such property.
(6) Benefit limited to life of intellectual
property.--Income shall not be treated as properly
allocable to qualified intellectual property for
purposes of this subsection if such income is received
by or accrued to the donee after the expiration of the
legal life of such property.
(7) Applicable percentage.--For purposes of this
subsection, the term ``applicable percentage'' means
the percentage determined under the following table
which corresponds to a taxable year of the donor ending
on or after the date of the qualified intellectual
property contribution:
(8) Qualified intellectual property contribution.--
For purposes of this subsection, the term ``qualified
intellectual property contribution'' means any
charitable contribution of qualified intellectual
property--
(A) the amount of which taken into account
under this section is reduced by reason of
subsection (e)(1), and
(B) with respect to which the donor informs
the donee at the time of such contribution that
the donor intends to treat such contribution as
a qualified intellectual property contribution
for purposes of this subsection and section
6050L.
(9) Qualified intellectual property.--For purposes of
this subsection, the term ``qualified intellectual
property'' means property described in subsection
(e)(1)(B)(iii) (other than property contributed to or
for the use of an organization described in subsection
(e)(1)(B)(ii)).
(10) Other special rules.--
(A) Application of limitations on charitable
contributions.--Any increase under this
subsection of the deduction provided under
subsection (a) shall be treated for purposes of
subsection (b) as a deduction which is
attributable to a charitable contribution to
the donee to which such increase relates.
(B) Net income determined by donee.--The net
income taken into account under paragraph (3)
shall not exceed the amount of such income
reported under section 6050L(b)(1).
(C) Deduction limited to 12 taxable years.--
Except as may be provided under subparagraph
(D)(i), this subsection shall not apply with
respect to any qualified intellectual property
contribution for any taxable year of the donor
after the 12th taxable year of the donor which
ends on or after the date of such contribution.
(D) Regulations.--The Secretary may issue
regulations or other guidance to carry out the
purposes of this subsection, including
regulations or guidance--
(i) modifying the application of this
subsection in the case of a donor or
donee with a short taxable year, and
(ii) providing for the determination
of an amount to be treated as net
income of the donee which is properly
allocable to qualified intellectual
property in the case of a donee who
uses such property to further a purpose
or function constituting the basis of
the donee's exemption under section 501
(or, in the case of a governmental
unit, any purpose described in section
170(c)) and does not possess a right to
receive any payment from a third party
with respect to such property.
(n) Expenses paid by certain whaling captains in support of
Native Alaskan subsistence whaling.--
(1) In general.--In the case of an individual who is
recognized by the Alaska Eskimo Whaling Commission as a
whaling captain charged with the responsibility of
maintaining and carrying out sanctioned whaling
activities and who engages in such activities during
the taxable year, the amount described in paragraph (2)
(to the extent such amount does not exceed $10,000 for
the taxable year) shall be treated for purposes of this
section as a charitable contribution.
(2) Amount described.--
(A) In general.--The amount described in this
paragraph is the aggregate of the reasonable
and necessary whaling expenses paid by the
taxpayer during the taxable year in carrying
out sanctioned whaling activities.
(B) Whaling expenses.--For purposes of
subparagraph (A), the term ``whaling expenses''
includes expenses for--
(i) the acquisition and maintenance
of whaling boats, weapons, and gear
used in sanctioned whaling activities,
(ii) the supplying of food for the
crew and other provisions for carrying
out such activities, and
(iii) storage and distribution of the
catch from such activities.
(3) Sanctioned whaling activities.--For purposes of
this subsection, the term ``sanctioned whaling
activities'' means subsistence bowhead whale hunting
activities conducted pursuant to the management plan of
the Alaska Eskimo Whaling Commission.
(4) Substantiation of expenses.--The Secretary shall
issue guidance requiring that the taxpayer substantiate
the whaling expenses for which a deduction is claimed
under this subsection, including by maintaining
appropriate written records with respect to the time,
place, date, amount, and nature of the expense, as well
as the taxpayer's eligibility for such deduction, and
that (to the extent provided by the Secretary) such
substantiation be provided as part of the taxpayer's
return of tax.
(o) Special rules for fractional gifts.--
(1) Denial of deduction in certain cases.--
(A) In general.--No deduction shall be
allowed for a contribution of an undivided
portion of a taxpayer's entire interest in
tangible personal property unless all interests
in the property are held immediately before
such contribution by--
(i) the taxpayer, or
(ii) the taxpayer and the donee.
(B) Exceptions.--The Secretary may, by
regulation, provide for exceptions to
subparagraph (A) in cases where all persons who
hold an interest in the property make
proportional contributions of an undivided
portion of the entire interest held by such
persons.
(2) Valuation of subsequent gifts.--In the case of
any additional contribution, the fair market value of
such contribution shall be determined by using the
lesser of--
(A) the fair market value of the property at
the time of the initial fractional
contribution, or
(B) the fair market value of the property at
the time of the additional contribution.
(3) Recapture of deduction in certain cases; addition
to tax.--
(A) Recapture.--The Secretary shall provide
for the recapture of the amount of any
deduction allowed under this section (plus
interest) with respect to any contribution of
an undivided portion of a taxpayer's entire
interest in tangible personal property--
(i) in any case in which the donor
does not contribute all of the
remaining interests in such property to
the donee (or, if such donee is no
longer in existence, to any person
described in section 170(c)) on or
before the earlier of--
(I) the date that is 10 years
after the date of the initial
fractional contribution, or
(II) the date of the death of
the donor, and
(ii) in any case in which the donee
has not, during the period beginning on
the date of the initial fractional
contribution and ending on the date
described in clause (i)--
(I) had substantial physical
possession of the property, and
(II) used the property in a
use which is related to a
purpose or function
constituting the basis for the
organizations' exemption under
section 501.
(B) Addition to tax.--The tax imposed under
this chapter for any taxable year for which
there is a recapture under subparagraph (A)
shall be increased by 10 percent of the amount
so recaptured.
(4) Definitions.--For purposes of this subsection--
(A) Additional contribution.--The term
``additional contribution'' means any
charitable contribution by the taxpayer of any
interest in property with respect to which the
taxpayer has previously made an initial
fractional contribution.
(B) Initial fractional contribution.--The
term ``initial fractional contribution'' means,
with respect to any taxpayer, the first
charitable contribution of an undivided portion
of the taxpayer's entire interest in any
tangible personal property.
(p) Other cross references.--
(1) For treatment of certain organizations
providing child care, see section 501(k).
(2) For charitable contributions of estates
and trusts, see section 642(c).
(3) For nondeductibility of contributions by
common trust funds, see section 584.
(4) For charitable contributions of partners,
see section 702.
(5) For charitable contributions of
nonresident aliens, see section 873.
(6) For treatment of gifts for benefit of or
use in connection with the Naval Academy as
gifts to or for use of the United States, see
section 8473 of title 10, United States Code.
(7) For treatment of gifts accepted by the
Secretary of State, the Director of the
International Communication Agency, or the
Director of the United States International
Development Cooperation Agency, as gifts to or
for the use of the United States, see section
25 of the State Department Basic Authorities
Act of 1956.
(8) For treatment of gifts of money accepted
by the Attorney General for credit to the
``Commissary Funds Federal Prisons'' as gifts
to or for the use of the United States, see
section 4043 of title 18, United States Code.
(9) For charitable contributions to or for
the use of Indian tribal governments (or their
subdivisions), see section 7871.
* * * * * * *
SEC. 179. ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS ASSETS.
(a) Treatment as expenses.--A taxpayer may elect to treat the
cost of any section 179 property as an expense which is not
chargeable to capital account. Any cost so treated shall be
allowed as a deduction for the taxable year in which the
section 179 property is placed in service.
(b) Limitations.--
(1) Dollar limitation.--The aggregate cost which may
be taken into account under subsection (a) for any
taxable year shall not exceed $1,000,000.
(2) Reduction in limitation.--The limitation under
paragraph (1) for any taxable year shall be reduced
(but not below zero) by the amount by which the cost of
section 179 property placed in service during such
taxable year exceeds $2,500,000.
(3) Limitation based on income from trade or
business.--
(A) In general.--The amount allowed as a
deduction under subsection (a) for any taxable
year (determined after the application of
paragraphs (1) and (2)) shall not exceed the
aggregate amount of taxable income of the
taxpayer for such taxable year which is derived
from the active conduct by the taxpayer of any
trade or business during such taxable year.
(B) Carryover of disallowed deduction.--The
amount allowable as a deduction under
subsection (a) for any taxable year shall be
increased by the lesser of--
(i) the aggregate amount disallowed
under subparagraph (A) for all prior
taxable years (to the extent not
previously allowed as a deduction by
reason of this subparagraph), or
(ii) the excess (if any) of--
(I) the limitation of
paragraphs (1) and (2) (or if
lesser, the aggregate amount of
taxable income referred to in
subparagraph (A)), over
(II) the amount allowable as
a deduction under subsection
(a) for such taxable year
without regard to this
subparagraph.
(C) Computation of taxable income.--For
purposes of this paragraph, taxable income
derived from the conduct of a trade or business
shall be computed without regard to the
deduction allowable under this section.
(4) Married individuals filing separately.--In the
case of [a husband and wife filing] individuals married
to one another who file separate returns for the
taxable year--
(A) such individuals shall be treated as 1
taxpayer for purposes of paragraphs (1) and
(2), and
(B) unless such individuals elect otherwise,
50 percent of the cost which may be taken into
account under subsection (a) for such taxable
year (before application of paragraph (3))
shall be allocated to each such individual.
(5) Limitation on cost taken into account for certain
passenger vehicles.--
(A) In general.--The cost of any sport
utility vehicle for any taxable year which may
be taken into account under this section shall
not exceed $25,000.
(B) Sport utility vehicle.--For purposes of
subparagraph (A)--
(i) In general.--The term ``sport
utility vehicle'' means any 4-wheeled
vehicle--
(I) which is primarily
designed or which can be used
to carry passengers over public
streets, roads, or highways
(except any vehicle operated
exclusively on a rail or
rails),
(II) which is not subject to
section 280F, and
(III) which is rated at not
more than 14,000 pounds gross
vehicle weight.
(ii) Certain vehicles excluded.--Such
term does not include any vehicle
which--
(I) is designed to have a
seating capacity of more than 9
persons behind the driver's
seat,
(II) is equipped with a cargo
area of at least 6 feet in
interior length which is an
open area or is designed for
use as an open area but is
enclosed by a cap and is not
readily accessible directly
from the passenger compartment,
or
(III) has an integral
enclosure, fully enclosing the
driver compartment and load
carrying device, does not have
seating rearward of the
driver's seat, and has no body
section protruding more than 30
inches ahead of the leading
edge of the windshield.
(6) Inflation adjustment.--
(A) In general.--In the case of any taxable
year beginning after 2018, the dollar amounts
in paragraphs (1), (2), and (5)(A) shall each
be increased by an amount equal to--
(i) such dollar amount, multiplied by
(ii) the cost-of-living adjustment
determined under section 1(f)(3) for
the calendar year in which the taxable
year begins, determined by substituting
``calendar year 2017'' for ``calendar
year 2016'' in subparagraph (A)(ii)
thereof.
(B) Rounding.--The amount of any increase
under subparagraph (A) shall be rounded to the
nearest multiple of $10,000 ($100 in the case
of any increase in the amount under paragraph
(5)(A)).
(c) Election.--
(1) In general.--An election under this section for
any taxable year shall--
(A) specify the items of section 179 property
to which the election applies and the portion
of the cost of each of such items which is to
be taken into account under subsection (a), and
(B) be made on the taxpayer's return of the
tax imposed by this chapter for the taxable
year.
Such election shall be made in such manner as the
Secretary may by regulations prescribe.
(2) Election.--Any election made under this section,
and any specification contained in any such election,
may be revoked by the taxpayer with respect to any
property, and such revocation, once made, shall be
irrevocable.
(d) Definitions and special rules.--
(1) Section 179 property.--For purposes of this
section, the term ``section 179 property'' means
property--
(A) which is--
(i) tangible property (to which
section 168 applies), or
(ii) computer software (as defined in
section 197(e)(3)(B)) which is
described in section 197(e)(3)(A)(i)
and to which section 167 applies,
(B) which is--
(i) section 1245 property (as defined
in section 1245(a)(3)), or
(ii) at the election of the taxpayer,
qualified real property (as defined in
subsection (e)), and
(C) which is acquired by purchase for use in
the active conduct of a trade or business.
Such term shall not include any property described in
section 50(b) (other than paragraph (2) thereof).
(2) Purchase defined.--For purposes of paragraph (1),
the term ``purchase'' means any acquisition of
property, but only if--
(A) the property is not acquired from a
person whose relationship to the person
acquiring it would result in the disallowance
of losses under section 267 or 707(b) (but, in
applying section 267(b) and (c) for purposes of
this section, paragraph (4) of section 267(c)
shall be treated as providing that the family
of an individual shall include only [his
spouse] the individual's spouse, ancestors, and
lineal descendants),
(B) the property is not acquired by one
component member of a controlled group from
another component member of the same controlled
group, and
(C) the basis of the property in the hands of
the person acquiring it is not determined--
(i) in whole or in part by reference
to the adjusted basis of such property
in the hands of the person from whom
acquired, or
(ii) under section 1014(a) (relating
to property acquired from a decedent).
(3) Cost.--For purposes of this section, the cost of
property does not include so much of the basis of such
property as is determined by reference to the basis of
other property held at any time by the person acquiring
such property.
(4) Section not to apply to estates and trusts.--This
section shall not apply to estates and trusts.
(5) Section not to apply to certain noncorporate
lessors.--This section shall not apply to any section
179 property which is purchased by a person who is not
a corporation and with respect to which such person is
the lessor unless--
(A) the property subject to the lease has
been manufactured or produced by the lessor, or
(B) the term of the lease (taking into
account options to renew) is less than 50
percent of the class life of the property (as
defined in section 168(i)(1)), and for the
period consisting of the first 12 months after
the date on which the property is transferred
to the lessee the sum of the deductions with
respect to such property which are allowable to
the lessor solely by reason of section 162
(other than rents and reimbursed amounts with
respect to such property) exceeds 15 percent of
the rental income produced by such property.
(6) Dollar limitation of controlled group.--For
purposes of subsection (b) of this section--
(A) all component members of a controlled
group shall be treated as one taxpayer, and
(B) the Secretary shall apportion the dollar
limitation contained in subsection (b)(1) among
the component members of such controlled group
in such manner as he shall by regulations
prescribe.
(7) Controlled group defined.--For purposes of
paragraphs (2) and (6), the term ``controlled group''
has the meaning assigned to it by section 1563(a),
except that, for such purposes, the phrase ``more than
50 percent'' shall be substituted for the phrase ``at
least 80 percent'' each place it appears in section
1563(a)(1).
(8) Treatment of partnerships and S corporations.--In
the case of a partnership, the limitations of
subsection (b) shall apply with respect to the
partnership and with respect to each partner. A similar
rule shall apply in the case of an S corporation and
its shareholders.
(9) Coordination with section 38.--No credit shall be
allowed under section 38 with respect to any amount for
which a deduction is allowed under subsection (a).
(10) Recapture in certain cases.--The Secretary
shall, by regulations, provide for recapturing the
benefit under any deduction allowable under subsection
(a) with respect to any property which is not used
predominantly in a trade or business at any time.
(e) Qualified real property.--For purposes of this section,
the term ``qualified real property'' means--
(1) any qualified improvement property described in
section 168(e)(6), and
(2) any of the following improvements to
nonresidential real property placed in service after
the date such property was first placed in service:
(A) Roofs.
(B) Heating, ventilation, and air-
conditioning property.
(C) Fire protection and alarm systems.
(D) Security systems.
* * * * * * *
PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS
* * * * * * *
SEC. 213. MEDICAL, DENTAL, ETC., EXPENSES.
(a) Allowance of deduction.--There shall be allowed as a
deduction the expenses paid during the taxable year, not
compensated for by insurance or otherwise, for medical care of
the taxpayer, [his spouse] the taxpayer's spouse, or a
dependent (as defined in section 152, determined without regard
to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the
extent that such expenses exceed 10 percent of adjusted gross
income.
(b) Limitation with respect to medicine and drugs.--An amount
paid during the taxable year for medicine or a drug shall be
taken into account under subsection (a) only if such medicine
or drug is a prescribed drug or is insulin.
(c) Special rule for decedents.--
(1) Treatment of expenses paid after death.--For
purposes of subsection (a), expenses for the medical
care of the taxpayer which are paid out of [his estate]
the estate of the taxpayer during the 1-year period
beginning with the day after the date of [his death]
the death of the taxpayer shall be treated as paid by
the taxpayer at the time incurred.
(2) Limitation.--Paragraph (1) shall not apply if the
amount paid is allowable under section 2053 as a
deduction in computing the taxable estate of the
decedent, but this paragraph shall not apply if (within
the time and in the manner and form prescribed by the
Secretary) there is filed--
(A) a statement that such amount has not been
allowed as a deduction under section 2053, and
(B) a waiver of the right to have such amount
allowed at any time as a deduction under
section 2053.
(d) Definitions.--For purposes of this section--
(1) The term ``medical care'' means amounts paid--
(A) for the diagnosis, cure, mitigation,
treatment, or prevention of disease, or for the
purpose of affecting any structure or function
of the body,
(B) for transportation primarily for and
essential to medical care referred to in
subparagraph (A),
(C) for qualified long-term care services (as
defined in section 7702B(c)), or
(D) for insurance (including amounts paid as
premiums under part B of title XVIII of the
Social Security Act, relating to supplementary
medical insurance for the aged) covering
medical care referred to in subparagraphs (A)
and (B) or for any qualified long-term care
insurance contract (as defined in section
7702B(b)).
In the case of a qualified long-term care insurance
contract (as defined in section 7702B(b)), only
eligible long-term care premiums (as defined in
paragraph (10)) shall be taken into account under
subparagraph (D).
(2) Amounts paid for certain lodging away from home
treated as paid for medical care.--Amounts paid for
lodging (not lavish or extravagant under the
circumstances) while away from home primarily for and
essential to medical care referred to in paragraph
(1)(A) shall be treated as amounts paid for medical
care if--
(A) the medical care referred to in paragraph
(1)(A) is provided by a physician in a licensed
hospital (or in a medical care facility which
is related to, or the equivalent of, a licensed
hospital), and
(B) there is no significant element of
personal pleasure, recreation, or vacation in
the travel away from home.
The amount taken into account under the preceding
sentence shall not exceed $50 for each night for each
individual.
(3) Prescribed drug.--The term ``prescribed drug''
means a drug or biological which requires a
prescription of a physician for its use by an
individual.
(4) Physician.--The term ``physician'' has the
meaning given to such term by section 1861(r) of the
Social Security Act (42 U.S.C. 1395x(r)).
(5) Special rule in the case of child of divorced
parents, etc.--Any child to whom section 152(e) applies
shall be treated as a dependent of both parents for
purposes of this section.
(6) In the case of an insurance contract under which
amounts are payable for other than medical care
referred to in subparagraphs (A), (B), and (C) of
paragraph (1)--
(A) no amount shall be treated as paid for
insurance to which paragraph (1)(D) applies
unless the charge for such insurance is either
separately stated in the contract, or furnished
to the policyholder by the insurance company in
a separate statement,
(B) the amount taken into account as the
amount paid for such insurance shall not exceed
such charge, and
(C) no amount shall be treated as paid for
such insurance if the amount specified in the
contract (or furnished to the policyholder by
the insurance company in a separate statement)
as the charge for such insurance is
unreasonably large in relation to the total
charges under the contract.
(7) Subject to the limitations of paragraph (6),
premiums paid during the taxable year by a taxpayer
before [he] the taxpayer attains the age of 65 for
insurance covering medical care (within the meaning of
subparagraphs (A), (B), and (C) of paragraph (1)) for
the taxpayer, [his spouse] the taxpayer's spouse, or a
dependent after the taxpayer attains the age of 65
shall be treated as expenses paid during the taxable
year for insurance which constitutes medical care if
premiums for such insurance are payable (on a level
payment basis) under the contract for a period of 10
years or more or until the year in which the taxpayer
attains the age of 65 (but in no case for a period of
less than 5 years).
(8) The determination of whether an individual is
married at any time during the taxable year shall be
made in accordance with the provisions of section
6013(d) (relating to determination of [status as
husband and wife] marital status).
(9) Cosmetic surgery.--
(A) In general.--The term ``medical care''
does not include cosmetic surgery or other
similar procedures, unless the surgery or
procedure is necessary to ameliorate a
deformity arising from, or directly related to,
a congenital abnormality, a personal injury
resulting from an accident or trauma, or
disfiguring disease.
(B) Cosmetic surgery defined.--For purposes
of this paragraph, the term ``cosmetic
surgery'' means any procedure which is directed
at improving the patient's appearance and does
not meaningfully promote the proper function of
the body or prevent or treat illness or
disease.
(10) Eligible long-term care premiums.--
(A) In general.--For purposes of this
section, the term ``eligible long-term care
premiums'' means the amount paid during a
taxable year for any qualified long-term care
insurance contract (as defined in section
7702B(b)) covering an individual, to the extent
such amount does not exceed the limitation
determined under the following table:
(B) Indexing.--
(i) In general.--In the case of any
taxable year beginning in a calendar
year after 1997, each dollar amount
contained in subparagraph (A) shall be
increased by the medical care cost
adjustment of such amount for such
calendar year. If any increase
determined under the preceding sentence
is not a multiple of $10, such increase
shall be rounded to the nearest
multiple of $10.
(ii) Medical care cost adjustment.--
For purposes of clause (i), the medical
care cost adjustment for any calendar
year is the percentage (if any) by
which--
(I) the medical care
component of the C-CPI-U (as
defined in section 1(f)(6)) for
August of the preceding
calendar year, exceeds
(II) such component of the
CPI (as defined in section
1(f)(4)) for August of 1996,
multiplied by the amount
determined under section
1(f)(3)(B).
The Secretary shall, in consultation with the
Secretary of Health and Human Services,
prescribe an adjustment which the Secretary
determines is more appropriate for purposes of
this paragraph than the adjustment described in
the preceding sentence, and the adjustment so
prescribed shall apply in lieu of the
adjustment described in the preceding sentence.
(11) Certain payments to relatives treated as not
paid for medical care.--An amount paid for a qualified
long-term care service (as defined in section 7702B(c))
provided to an individual shall be treated as not paid
for medical care if such service is provided--
(A) by the spouse of the individual or by a
relative (directly or through a partnership,
corporation, or other entity) unless the
service is provided by a licensed professional
with respect to such service, or
(B) by a corporation or partnership which is
related (within the meaning of section 267(b)
or 707(b)) to the individual.
For purposes of this paragraph, the term ``relative''
means an individual bearing a relationship to the
individual which is described in any of subparagraphs
(A) through (G) of section 152(d)(2). This paragraph
shall not apply for purposes of section 105(b) with
respect to reimbursements through insurance.
(e) Exclusion of amounts allowed for care of certain
dependents.--Any expense allowed as a credit under section 21
shall not be treated as an expense paid for medical care.
(f) Special rules for 2013 through 2018.--In the case of any
taxable year--
(1) beginning after December 31, 2012, and ending
before January 1, 2017, in the case of a taxpayer if
such taxpayer or such taxpayer's spouse has attained
age 65 before the close of such taxable year, and
(2) beginning after December 31, 2016, and ending
before January 1, 2019, in the case of any taxpayer,
subsection (a) shall be applied with respect to a taxpayer by
substituting ``7.5 percent'' for ``10 percent''.
* * * * * * *
SEC. 217. MOVING EXPENSES.
(a) Deduction allowed.--There shall be allowed as a deduction
moving expenses paid or incurred during the taxable year in
connection with the commencement of work by the taxpayer as an
employee or as a self-employed individual at a new principal
place of work.
(b) Definition of moving expenses.--
(1) In general.--For purposes of this section, the
term ``moving expenses'' means only the reasonable
expenses--
(A) of moving household goods and personal
effects from the former residence to the new
residence, and
(B) of traveling (including lodging) from the
former residence to the new place of residence.
Such term shall not include any expenses for meals.
(2) Individuals other than taxpayer.--In the case of
any individual other than the taxpayer, expenses
referred to in paragraph (1) shall be taken into
account only if such individual has both the former
residence and the new residence as his principal place
of abode and is a member of the taxpayer's household.
(c) Conditions for allowance.--No deduction shall be allowed
under this section unless--
(1) the taxpayer's new principal place of work--
(A) is at least 50 miles farther from his
former residence than was his former principal
place of work, or
(B) if he had no former principal place of
work, is at least 50 miles from his former
residence, and
(2) either--
(A) during the 12-month period immediately
following his arrival in the general location
of his new principal place of work, the
taxpayer is a full-time employee, in such
general location, during at least 39 weeks, or
(B) during the 24-month period immediately
following his arrival in the general location
of his new principal place of work, the
taxpayer is a full-time employee or performs
services as a self-employed individual on a
full-time basis, in such general location,
during at least 78 weeks, of which not less
than 39 weeks are during the 12-month period
referred to in subparagraph (A).
For purposes of paragraph (1), the distance between two
points shall be the shortest of the more commonly
traveled routes between such two points.
(d) Rules for application of subsection (c)(2).--
(1) The condition of subsection (c)(2) shall not
apply if the taxpayer is unable to satisfy such
condition by reason of--
(A) death or disability, or
(B) involuntary separation (other than for
willful misconduct) from the service of, or
transfer for the benefit of, an employer after
obtaining full-time employment in which the
taxpayer could reasonably have been expected to
satisfy such condition.
(2) If a taxpayer has not satisfied the condition of
subsection (c)(2) before the time prescribed by law
(including extensions thereof) for filing the return
for the taxable year during which he paid or incurred
moving expenses which would otherwise be deductible
under this section, but may still satisfy such
condition, then such expenses may (at the election of
the taxpayer) be deducted for such taxable year
notwithstanding subsection (c)(2).
(3) If--
(A) for any taxable year moving expenses have
been deducted in accordance with the rule
provided in paragraph (2), and
(B) the condition of subsection (c)(2) cannot
be satisfied at the close of a subsequent
taxable year,
then an amount equal to the expenses which were so
deducted shall be included in gross income for the
first such subsequent taxable year.
(f) Self-employed individual.--For purposes of this section,
the term ``self-employed individual'' means an individual who
performs personal services--
(1) as the owner of the entire interest in an
unincorporated trade or business, or
(2) as a partner in a partnership carrying on a trade
or business.
(g) Rules for members of the Armed Forces of the United
States.--In the case of a member of the Armed Forces of the
United States on active duty who moves pursuant to a military
order and incident to a permanent change of station--
(1) the limitations under subsection (c) shall not
apply;
(2) any moving and storage expenses which are
furnished in kind (or for which reimbursement or an
allowance is provided, but only to the extent of the
expenses paid or incurred) to such member[, his spouse,
or his dependents] or the spouse or dependents of such
member, shall not be includible in gross income, and no
reporting with respect to such expenses shall be
required by the Secretary of Defense or the Secretary
of Transportation, as the case may be; and
(3) if moving and storage expenses are furnished in
kind (or if reimbursement or an allowance for such
expenses is provided) to such member's spouse and [his
dependents] dependents with regard to moving to a
location other than the one to which such member moves
(or from a location other than the one from which such
member moves), this section shall apply with respect to
the moving expenses of [his spouse] the member's spouse
and dependents--
(A) as if [his spouse] the member's spouse
commenced work as an employee at a new
principal place of work at such location; and
(B) without regard to the limitations under
subsection (c).
(h) Special rules for foreign moves.--
(1) Allowance of certain storage fees.--In the case
of a foreign move, for purposes of this section, the
moving expenses described in subsection (b)(1)(A)
include the reasonable expenses--
(A) of moving household goods and personal
effects to and from storage, and
(B) of storing such goods and effects for
part or all of the period during which the new
place of work continues to be the taxpayer's
principal place of work.
(2) Foreign move.--For purposes of this subsection,
the term ``foreign move'' means the commencement of
work by the taxpayer at a new principal place of work
located outside the United States.
(3) United States defined.--For purposes of this
subsection and subsection (i), the term ``United
States'' includes the possessions of the United States.
(i) Allowance of deductions in case of retirees or decedents
who were working abroad.--
(1) In general.--In the case of any qualified retiree
moving expenses or qualified survivor moving expenses--
(A) this section (other than subsection (h))
shall be applied with respect to such expenses
as if they were incurred in connection with the
commencement of work by the taxpayer as an
employee at a new principal place of work
located within the United States, and
(B) the limitations of subsection (c)(2)
shall not apply.
(2) Qualified retiree moving expenses.--For purposes
of paragraph (1), the term ``qualified retiree moving
expenses'' means any moving expenses--
(A) which are incurred by an individual whose
former principal place of work and former
residence were outside the United States, and
(B) which are incurred for a move to a new
residence in the United States in connection
with the bona fide retirement of the
individual.
(3) Qualified survivor moving expenses.--For purposes
of paragraph (1), the term ``qualified survivor moving
expenses'' means moving expenses--
(A) which are paid or incurred by the spouse
or any dependent of any decedent who (as of the
time of [his] death) had a principal place of
work outside the United States, and
(B) which are incurred for a move which
begins within 6 months after the death of such
decedent and which is to a residence in the
United States from a former residence outside
the United States which (as of the time of the
decedent's death) was the residence of such
decedent and the individual paying or incurring
the expense.
(j) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the purposes of
this section.
(k) Suspension of deduction for taxable years 2018 through
2025.--Except in the case of an individual to whom subsection
(g) applies, this section shall not apply to any taxable year
beginning after December 31, 2017, and before January 1, 2026.
* * * * * * *
SEC. 219. RETIREMENT SAVINGS.
(a) Allowance of deduction.--In the case of an individual,
there shall be allowed as a deduction an amount equal to the
qualified retirement contributions of the individual for the
taxable year.
(b) Maximum amount of deduction.--
(1) In general.--The amount allowable as a deduction
under subsection (a) to any individual for any taxable
year shall not exceed the lesser of--
(A) the deductible amount, or
(B) an amount equal to the compensation
includible in the individual's gross income for
such taxable year.
(2) Special rule for employer contributions under
simplified employee pensions.--This section shall not
apply with respect to an employer contribution to a
simplified employee pension.
(3) Plans under section 501(c)(18).--Notwithstanding
paragraph (1), the amount allowable as a deduction
under subsection (a) with respect to any contributions
on behalf of an employee to a plan described in section
501(c)(18) shall not exceed the lesser of--
(A) $7,000, or
(B) an amount equal to 25 percent of the
compensation (as defined in section 415(c)(3))
includible in the individual's gross income for
such taxable year.
(4) Special rule for simple retirement accounts.--
This section shall not apply with respect to any amount
contributed to a simple retirement account established
under section 408(p).
(5) Deductible amount.--For purposes of paragraph
(1)(A)--
(A) In general.--The deductible amount is
$5,000.
(B) Catch-up contributions for individuals 50
or older.--
(i) In general.--In the case of an
individual who has attained the age of
50 before the close of the taxable
year, the deductible amount for such
taxable year shall be increased by the
applicable amount.
(ii) Applicable amount.--For purposes
of clause (i), the applicable amount is
$1,000.
(C) Cost-of-living adjustment.--
(i) In general.--In the case of any
taxable year beginning in a calendar
year after 2008, the $5,000 amount
under subparagraph (A) shall be
increased by an amount equal to--
(I) such dollar amount,
multiplied by
(II) the cost-of-living
adjustment determined under
section 1(f)(3) for the
calendar year in which the
taxable year begins, determined
by substituting ``calendar year
2007'' for ``calendar year
2016'' in subparagraph (A)(ii)
thereof.
(ii) Rounding rules.--If any amount
after adjustment under clause (i) is
not a multiple of $500, such amount
shall be rounded to the next lower
multiple of $500.
(c) Kay Bailey Hutchison Spousal IRA.--
(1) In general.--In the case of an individual to whom
this paragraph applies for the taxable year, the
limitation of paragraph (1) of subsection (b) shall be
equal to the lesser of--
(A) the dollar amount in effect under
subsection (b)(1)(A) for the taxable year, or
(B) the sum of--
(i) the compensation includible in
such individual's gross income for the
taxable year, plus
(ii) the compensation includible in
the gross income of such individual's
spouse for the taxable year reduced
by--
(I) the amount allowed as a
deduction under subsection (a)
to such spouse for such taxable
year,
(II) the amount of any
designated nondeductible
contribution (as defined in
section 408(o)) on behalf of
such spouse for such taxable
year, and
(III) the amount of any
contribution on behalf of such
spouse to a Roth IRA under
section 408A for such taxable
year.
(2) Individuals to whom paragraph (1) applies.--
Paragraph (1) shall apply to any individual if--
(A) such individual files a joint return for
the taxable year, and
(B) the amount of compensation (if any)
includible in such individual's gross income
for the taxable year is less than the
compensation includible in the gross income of
such individual's spouse for the taxable year.
(d) Other limitations and restrictions.--
(1) Beneficiary must be under age 701/2.--No
deduction shall be allowed under this section with
respect to any qualified retirement contribution for
the benefit of an individual if such individual has
attained age 701/2 before the close of such
individual's taxable year for which the contribution
was made.
(2) Recontributed amounts.--No deduction shall be
allowed under this section with respect to a rollover
contribution described in section 402(c), 403(a)(4),
403(b)(8), 408(d)(3), or 457(e)(16).
(3) Amounts contributed under endowment contract.--In
the case of an endowment contract described in section
408(b), no deduction shall be allowed under this
section for that portion of the amounts paid under the
contract for the taxable year which is properly
allocable, under regulations prescribed by the
Secretary, to the cost of life insurance.
(4) Denial of deduction for amount contributed to
inherited annuities or accounts.--No deduction shall be
allowed under this section with respect to any amount
paid to an inherited individual retirement account or
individual retirement annuity (within the meaning of
section 408(d)(3)(C)(ii)).
(e) Qualified retirement contribution.--For purposes of this
section, the term ``qualified retirement contribution'' means--
(1) any amount paid in cash for the taxable year by
or on behalf of an individual to an individual
retirement plan for such individual's benefit, and
(2) any amount contributed on behalf of any
individual to a plan described in section 501(c)(18).
(f) Other definitions and special rules.--
(1) Compensation.--For purposes of this section, the
term ``compensation'' includes earned income (as
defined in section 401(c)(2)). The term
``compensation'' does not include any amount received
as a pension or annuity and does not include any amount
received as deferred compensation. For purposes of this
paragraph, section 401(c)(2) shall be applied as if the
term trade or business for purposes of section 1402
included service described in subsection (c)(6). The
term ``compensation'' includes any differential wage
payment (as defined in section 3401(h)(2)).
(2) Married individuals.--The maximum deduction under
subsection (b) shall be computed separately for each
individual, and this section shall be applied without
regard to any community property laws.
(3) Time when contributions deemed made.--For
purposes of this section, a taxpayer shall be deemed to
have made a contribution to an individual retirement
plan on the last day of the preceding taxable year if
the contribution is made on account of such taxable
year and is made not later than the time prescribed by
law for filing the return for such taxable year (not
including extensions thereof).
(5) Employer payments.--For purposes of this title,
any amount paid by an employer to an individual
retirement plan shall be treated as payment of
compensation to the employee (other than a self-
employed individual who is an employee within the
meaning of section 401(c)(1)) includible in his gross
income in the taxable year for which the amount was
contributed, whether or not a deduction for such
payment is allowable under this section to the
employee.
(6) Excess contributions treated as contribution made
during subsequent year for which there is an unused
limitation.--
(A) In general.--If for the taxable year the
maximum amount allowable as a deduction under
this section for contributions to an individual
retirement plan exceeds the amount contributed,
then the taxpayer shall be treated as having
made an additional contribution for the taxable
year in an amount equal to the lesser of--
(i) the amount of such excess, or
(ii) the amount of the excess
contributions for such taxable year
(determined under section 4973(b)(2)
without regard to subparagraph (C)
thereof).
(B) Amount contributed.--For purposes of this
paragraph, the amount contributed--
(i) shall be determined without
regard to this paragraph, and
(ii) shall not include any rollover
contribution.
(C) Special rule where excess deduction was
allowed for closed year.--Proper reduction
shall be made in the amount allowable as a
deduction by reason of this paragraph for any
amount allowed as a deduction under this
section for a prior taxable year for which the
period for assessing deficiency has expired if
the amount so allowed exceeds the amount which
should have been allowed for such prior taxable
year.
(7) Special rule for compensation earned by members
of the Armed Forces for service in a combat zone..--For
purposes of subsections (b)(1)(B) and (c), the amount
of compensation includible in an individual's gross
income shall be determined without regard to section
112.
(8) Election not to deduct contributions.--For
election not to deduct contributions to individual
retirement plans, see section 408(o)(2)(B)(ii).
(g) Limitation on deduction for active participants in
certain pension plans.--
(1) In general.--If (for any part of any plan year
ending with or within a taxable year) an individual or
the individual's spouse is an active participant, each
of the dollar limitations contained in subsections
(b)(1)(A) and (c)(1)(A) for such taxable year shall be
reduced (but not below zero) by the amount determined
under paragraph (2).
(2) Amount of reduction.--
(A) In general.--The amount determined under
this paragraph with respect to any dollar
limitation shall be the amount which bears the
same ratio to such limitation as--
(i) the excess of--
(I) the taxpayer's adjusted
gross income for such taxable
year, over
(II) the applicable dollar
amount, bears to
(ii) $10,000 ($20,000 in the case of
a joint return).
(B) No reduction below $200 until complete
phase-out.--No dollar limitation shall be
reduced below $200 under paragraph (1) unless
(without regard to this subparagraph) such
limitation is reduced to zero.
(C) Rounding.--Any amount determined under
this paragraph which is not a multiple of $10
shall be rounded to the next lowest $10.
(3) Adjusted gross income; applicable dollar
amount.--For purposes of this subsection--
(A) Adjusted gross income.--Adjusted gross
income of any taxpayer shall be determined--
(i) after application of sections 86
and 469, and
(ii) without regard to sections 135,
137, 221, 222, and 911 or the deduction
allowable under this section.
(B) Applicable dollar amount.--The term
``applicable dollar amount'' means the
following:
(i) In the case of a taxpayer filing
a joint return, $80,000.
(ii) In the case of any other
taxpayer (other than a married
individual filing a separate return),
$50,000.
(iii) In the case of a married
individual filing a separate return,
zero.
(4) Special rule for married individuals filing
separately and living apart.-- [A husband and wife]
Married individuals who--
(A) file separate returns for any taxable
year, and
(B) live apart at all times during such
taxable year,
shall not be treated as married individuals for
purposes of this subsection.
(5) Active participant.--For purposes of this
subsection, the term ``active participant'' means, with
respect to any plan year, an individual--
(A) who is an active participant in--
(i) a plan described in section
401(a) which includes a trust exempt
from tax under section 501(a),
(ii) an annuity plan described in
section 403(a),
(iii) a plan established for its
employees by the United States, by a
State or political subdivision thereof,
or by an agency or instrumentality of
any of the foregoing,
(iv) an annuity contract described in
section 403(b),
(v) a simplified employee pension
(within the meaning of section 408(k)),
or
(vi) any simple retirement account
(within the meaning of section 408(p)),
or
(B) who makes deductible contributions to a
trust described in section 501(c)(18).
The determination of whether an individual is an active
participant shall be made without regard to whether or
not such individual's rights under a plan, trust, or
contract are nonforfeitable. An eligible deferred
compensation plan (within the meaning of section
457(b)) shall not be treated as a plan described in
subparagraph (A)(iii).
(6) Certain individuals not treated as active
participants.--For purposes of this subsection, any
individual described in any of the following
subparagraphs shall not be treated as an active
participant for any taxable year solely because of any
participation so described:
(A) Members of reserve components.--
Participation in a plan described in
subparagraph (A)(iii) of paragraph (5) by
reason of service as a member of a reserve
component of the Armed Forces (as defined in
section 10101 of title 10), unless such
individual has served in excess of 90 days on
active duty (other than active duty for
training) during the year.
(B) Volunteer firefighters.--A volunteer
firefighter--
(i) who is a participant in a plan
described in subparagraph (A)(iii) of
paragraph (5) based on his activity as
a volunteer firefighter, and
(ii) whose accrued benefit as of the
beginning of the taxable year is not
more than an annual benefit of $1,800
(when expressed as a single life
annuity commencing at age 65).
(7) Special rule for spouses who are not active
participants.--If this subsection applies to an
individual for any taxable year solely because their
spouse is an active participant, then, in applying this
subsection to the individual (but not their spouse)--
(A) the applicable dollar amount under
paragraph (3)(B)(i) shall be $150,000; and
(B) the amount applicable under paragraph
(2)(A)(ii) shall be $10,000.
(8) Inflation adjustment.--In the case of any taxable
year beginning in a calendar year after 2006, each of
the dollar amounts in paragraphs (3)(B)(i), (3)(B)(ii),
and (7)(A) shall be be increased by an amount equal
to--
(A) such dollar amount, multiplied by
(B) the cost-of-living adjustment determined
under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by
substituting ``calendar year 2005'' for
``calendar year 2016'' in subparagraph (A)(ii)
thereof.
Any increase determined under the preceding sentence
shall be rounded to the nearest multiple of $1,000.
* * * * * * *
PART IX--ITEMS NOT DEDUCTIBLE
* * * * * * *
SEC. 267. LOSSES, EXPENSES, AND INTEREST WITH RESPECT TO TRANSACTIONS
BETWEEN RELATED TAXPAYERS.
(a) In general.--
(1) Deduction for losses disallowed.--No deduction
shall be allowed in respect of any loss from the sale
or exchange of property, directly or indirectly,
between persons specified in any of the paragraphs of
subsection (b). The preceding sentence shall not apply
to any loss of the distributing corporation (or the
distributee) in the case of a distribution in complete
liquidation.
(2) Matching of deduction and payee income item in
the case of expenses and interest.--If--
(A) by reason of the method of accounting of
the person to whom the payment is to be made,
the amount thereof is not (unless paid)
includible in the gross income of such person,
and
(B) at the close of the taxable year of the
taxpayer for which (but for this paragraph) the
amount would be deductible under this chapter,
both the taxpayer and the person to whom the
payment is to be made are persons specified in
any of the paragraphs of subsection (b),
then any deduction allowable under this chapter in
respect of such amount shall be allowable as of the day
as of which such amount is includible in the gross
income of the person to whom the payment is made (or,
if later, as of the day on which it would be so
allowable but for this paragraph). For purposes of this
paragraph, in the case of a personal service
corporation (within the meaning of section 441(i)(2)),
such corporation and any employee-owner (within the
meaning of section 269A(b)(2), as modified by section
441(i)(2)) shall be treated as persons specified in
subsection (b).
(3) Payments to foreign persons.--
(A) In general.--The Secretary shall by
regulations apply the matching principle of
paragraph (2) in cases in which the person to
whom the payment is to be made is not a United
States person.
(B) Special rule for certain foreign
entities.--
(i) In general.--Notwithstanding
subparagraph (A), in the case of any
item payable to a controlled foreign
corporation (as defined in section 957)
or a passive foreign investment company
(as defined in section 1297), a
deduction shall be allowable to the
payor with respect to such amount for
any taxable year before the taxable
year in which paid only to the extent
that an amount attributable to such
item is includible (determined without
regard to properly allocable deductions
and qualified deficits under section
952(c)(1)(B)) during such prior taxable
year in the gross income of a United
States person who owns (within the
meaning of section 958(a)) stock in
such corporation.
(ii) Secretarial authority.--The
Secretary may by regulation exempt
transactions from the application of
clause (i), including any transaction
which is entered into by a payor in the
ordinary course of a trade or business
in which the payor is predominantly
engaged and in which the payment of the
accrued amounts occurs within 81/2
months after accrual or within such
other period as the Secretary may
prescribe.
(b) Relationships.--The persons referred to in subsection (a)
are:
(1) Members of a family, as defined in subsection
(c)(4);
(2) An individual and a corporation more than 50
percent in value of the outstanding stock of which is
owned, directly or indirectly, by or for such
individual;
(3) Two corporations which are members of the same
controlled group (as defined in subsection (f));
(4) A grantor and a fiduciary of any trust;
(5) A fiduciary of a trust and a fiduciary of another
trust, if the same person is a grantor of both trusts;
(6) A fiduciary of a trust and a beneficiary of such
trust;
(7) A fiduciary of a trust and a beneficiary of
another trust, if the same person is a grantor of both
trusts;
(8) A fiduciary of a trust and a corporation more
than 50 percent in value of the outstanding stock of
which is owned, directly or indirectly, by or for the
trust or by or for a person who is a grantor of the
trust;
(9) A person and an organization to which section 501
(relating to certain educational and charitable
organizations which are exempt from tax) applies and
which is controlled directly or indirectly by such
person or (if such person is an individual) by members
of the family of such individual;
(10) A corporation and a partnership if the same
persons own--
(A) more than 50 percent in value of the
outstanding stock of the corporation, and
(B) more than 50 percent of the capital
interest, or the profits interest, in the
partnership;
(11) An S corporation and another S corporation if
the same persons own more than 50 percent in value of
the outstanding stock of each corporation;
(12) An S corporation and a C corporation, if the
same persons own more than 50 percent in value of the
outstanding stock of each corporation; or
(13) Except in the case of a sale or exchange in
satisfaction of a pecuniary bequest, an executor of an
estate and a beneficiary of such estate.
(c) Constructive ownership of stock.--For purposes of
determining, in applying subsection (b), the ownership of
stock--
(1) Stock owned, directly or indirectly, by or for a
corporation, partnership, estate, or trust shall be
considered as being owned proportionately by or for its
shareholders, partners, or beneficiaries;
(2) An individual shall be considered as owning the
stock owned, directly or indirectly, by or for [his]
the individual's family;
(3) An individual owning (otherwise than by the
application of paragraph (2)) any stock in a
corporation shall be considered as owning the stock
owned, directly or indirectly, by or for [his] the
individual's partner;
(4) The family of an individual shall include only
[his] the individual's brothers and sisters (whether by
the whole or half blood), spouse, ancestors, and lineal
descendants; and
(5) Stock constructively owned by a person by reason
of the application of paragraph (1) shall, for the
purpose of applying paragraph (1), (2), or (3), be
treated as actually owned by such person, but stock
constructively owned by an individual by reason of the
application of paragraph (2) or (3) shall not be
treated as owned by him for the purpose of again
applying either of such paragraphs in order to make
another the constructive owner of such stock.
(d) Amount of gain where loss previously disallowed.--
(1) In general.--If--
(A) in the case of a sale or exchange of
property to the taxpayer a loss sustained by
the transferor is not allowable to the
transferor as a deduction by reason of
subsection (a)(1), and
(B) the taxpayer sells or otherwise disposes
of such property (or of other property the
basis of which in the taxpayer's hands is
determined directly or indirectly by reference
to such property) at a gain,
then such gain shall be recognized only to the extent
that it exceeds so much of such loss as is properly
allocable to the property sold or otherwise disposed of
by the taxpayer.
(2) Exception for wash sales.--Paragraph (1) shall
not apply if the loss sustained by the transferor is
not allowable to the transferor as a deduction by
reason of section 1091 (relating to wash sales).
(3) Exception for transfers from tax indifferent
parties.--Paragraph (1) shall not apply to the extent
any loss sustained by the transferor (if allowed) would
not be taken into account in determining a tax imposed
under section 1 or 11 or a tax computed as provided by
either of such sections.
(e) Special rules for pass-thru entities.--
(1) In general.--In the case of any amount paid or
incurred by, to, or on behalf of, a pass-thru entity,
for purposes of applying subsection (a)(2)--
(A) such entity,
(B) in the case of--
(i) a partnership, any person who
owns (directly or indirectly) any
capital interest or profits interest of
such partnership, or
(ii) an S corporation, any person who
owns (directly or indirectly) any of
the stock of such corporation,
(C) any person who owns (directly or
indirectly) any capital interest or profits
interest of a partnership in which such entity
owns (directly or indirectly) any capital
interest or profits interest, and
(D) any person related (within the meaning of
subsection (b) of this section or section
707(b)(1)) to a person described in
subparagraph (B) or (C),
shall be treated as persons specified in a paragraph of
subsection (b). Subparagraph (C) shall apply to a
transaction only if such transaction is related either
to the operations of the partnership described in such
subparagraph or to an interest in such partnership.
(2) Pass-thru entity.--For purposes of this section,
the term ``pass-thru entity'' means--
(A) a partnership, and
(B) an S corporation.
(3) Constructive ownership in the case of
partnerships.--For purposes of determining ownership of
a capital interest or profits interest of a
partnership, the principles of subsection (c) shall
apply, except that--
(A) paragraph (3) of subsection (c) shall not
apply, and
(B) interests owned (directly or indirectly)
by or for a C corporation shall be considered
as owned by or for any shareholder only if such
shareholder owns (directly or indirectly) 5
percent or more in value of the stock of such
corporation.
(4) Subsection (a)(2) not to apply to certain
guaranteed payments of partnerships.--In the case of
any amount paid or incurred by a partnership,
subsection (a)(2) shall not apply to the extent that
section 707(c) applies to such amount.
(5) Exception for certain expenses and interest of
partnerships owning low-income housing.--
(A) In general.--This subsection shall not
apply with respect to qualified expenses and
interest paid or incurred by a partnership
owning low-income housing to--
(i) any qualified 5-percent or less
partner of such partnership, or
(ii) any person related (within the
meaning of subsection (b) of this
section or section 707(b)(1)) to any
qualified 5-percent or less partner of
such partnership.
(B) Qualified 5-percent or less partner.--For
purposes of this paragraph, the term
``qualified 5-percent or less partner'' means
any partner who has (directly or indirectly) an
interest of 5 percent or less in the aggregate
capital and profits interests of the
partnership but only if--
(i) such partner owned the low-income
housing at all times during the 2-year
period ending on the date such housing
was transferred to the partnership, or
(ii) such partnership acquired the
low-income housing pursuant to a
purchase, assignment, or other transfer
from the Department of Housing and
Urban Development or any State or local
housing authority.
For purposes of the preceding sentence, a
partner shall be treated as holding any
interest in the partnership which is held
(directly or indirectly) by any person related
(within the meaning of subsection (b) of this
section or section 707(b)(1)) to such partner.
(C) Qualified expenses and interest.--For
purpose of this paragraph, the term ``qualified
expenses and interest'' means any expense or
interest incurred by the partnership with
respect to low-income housing held by the
partnership but--
(i) only if the amount of such
expense or interest (as the case may
be) is unconditionally required to be
paid by the partnership not later than
10 years after the date such amount was
incurred, and
(ii) in the case of such interest,
only if such interest is incurred at an
annual rate not in excess of 12
percent.
(D) Low-income housing.--For purposes of this
paragraph, the term ``low-income housing''
means--
(i) any interest in property
described in clause (i), (ii), (iii),
or (iv) of section 1250(a)(1)(B), and
(ii) any interest in a partnership
owning such property.
(6) Cross reference.--For additional rules relating
to partnerships, see section 707(b).
(f) Controlled group defined; special rules applicable to
controlled groups.--
(1) Controlled group defined.--For purposes of this
section, the term ``controlled group'' has the meaning
given to such term by section 1563(a), except that--
(A) ``more than 50 percent'' shall be
substituted for ``at least 80 percent'' each
place it appears in section 1563(a), and
(B) the determination shall be made without
regard to subsections (a)(4) and (e)(3)(C) of
section 1563.
(2) Deferral (rather than denial) of loss from sale
or exchange between members.--In the case of any loss
from the sale or exchange of property which is between
members of the same controlled group and to which
subsection (a)(1) applies (determined without regard to
this paragraph but with regard to paragraph (3))--
(A) subsections (a)(1) and (d) shall not
apply to such loss, but
(B) such loss shall be deferred until the
property is transferred outside such controlled
group and there would be recognition of loss
under consolidated return principles or until
such other time as may be prescribed in
regulations.
(3) Loss deferral rules not to apply in certain
cases.--
(A) Transfer to DISC.--For purposes of
applying subsection (a)(1), the term
``controlled group'' shall not include a DISC.
(B) Certain sales of inventory.--Except to
the extent provided in regulations prescribed
by the Secretary, subsection (a)(1) shall not
apply to the sale or exchange of property
between members of the same controlled group
(or persons described in subsection (b)(10))
if--
(i) such property in the hands of the
transferor is property described in
section 1221(a)(1),
(ii) such sale or exchange is in the
ordinary course of the transferor's
trade or business,
(iii) such property in the hands of
the transferee is property described in
section 1221(a)(1), and
(iv) the transferee or the transferor
is a foreign corporation.
(C) Certain foreign currency losses.--To the
extent provided in regulations, subsection
(a)(1) shall not apply to any loss sustained by
a member of a controlled group on the repayment
of a loan made to another member of such group
if such loan is payable in a foreign currency
or is denominated in such a currency and such
loss is attributable to a reduction in value of
such foreign currency.
(D) Redemptions by fund-of-funds regulated
investment companies.--Except to the extent
provided in regulations prescribed by the
Secretary, subsection (a)(1) shall not apply to
any distribution in redemption of stock of a
regulated investment company if--
(i) such company issues only stock
which is redeemable upon the demand of
the stockholder, and
(ii) such redemption is upon the
demand of another regulated investment
company.
(4) Determination of relationship resulting in
disallowance of loss, for purposes of other
provisions.--For purposes of any other section of this
title which refers to a relationship which would result
in a disallowance of losses under this section,
deferral under paragraph (2) shall be treated as
disallowance.
(g) Coordination with section 1041.--Subsection (a)(1) shall
not apply to any transfer described in section 1041(a)
(relating to transfers of property between spouses or incident
to divorce).
* * * * * * *
SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC., EXPENSES.
(a) Entertainment, amusement, recreation, or qualified
transportation fringes.--
(1) In general.--No deduction otherwise allowable
under this chapter shall be allowed for any item--
(A) Activity.--With respect to an activity
which is of a type generally considered to
constitute entertainment, amusement, or
recreation, or
(B) Facility.--With respect to a facility
used in connection with an activity referred to
in subparagraph (A).
(2) Special rules.--For purposes of applying
paragraph (1)--
(A) Dues or fees to any social, athletic, or
sporting club or organization shall be treated
as items with respect to facilities.
(B) An activity described in section 212
shall be treated as a trade or business.
(3) Denial of deduction for club dues.--
Notwithstanding the preceding provisions of this
subsection, no deduction shall be allowed under this
chapter for amounts paid or incurred for membership in
any club organized for business, pleasure, recreation,
or other social purpose.
(4) Qualified transportation fringes.--No deduction
shall be allowed under this chapter for the expense of
any qualified transportation fringe (as defined in
section 132(f)) provided to an employee of the
taxpayer.
(b) Gifts.--
(1) Limitation.--No deduction shall be allowed under
section 162 or section 212 for any expense for gifts
made directly or indirectly to any individual to the
extent that such expense, when added to prior expenses
of the taxpayer for gifts made to such individual
during the same taxable year, exceeds $25. For purposes
of this section, the term ``gift'' means any item
excludable from gross income of the recipient under
section 102 which is not excludable from his gross
income under any other provision of this chapter, but
such term does not include--
(A) an item having a cost to the taxpayer not
in excess of $4.00 on which the name of the
taxpayer is clearly and permanently imprinted
and which is one of a number of identical items
distributed generally by the taxpayer, or
(B) a sign, display rack, or other
promotional material to be used on the business
premises of the recipient.
(2) Special rules.--
(A) In the case of a gift by a partnership,
the limitation contained in paragraph (1) shall
apply to the partnership as well as to each
member thereof.
(B) For purposes of paragraph (1), a [husband
and wife] married couple shall be treated as
one taxpayer.
(c) Certain foreign travel.--
(1) In general.--In the case of any individual who
travels outside the United States away from home in
pursuit of a trade or business or in pursuit of an
activity described in section 212, no deduction shall
be allowed under section 162 or section 212 for that
portion of the expenses of such travel otherwise
allowable under such section which, under regulations
prescribed by the Secretary, is not allocable to such
trade or business or to such activity.
(2) Exception.--Paragraph (1) shall not apply to the
expenses of any travel outside the United States away
from home if--
(A) such travel does not exceed one week, or
(B) the portion of the time of travel outside
the United States away from home which is not
attributable to the pursuit of the taxpayer's
trade or business or an activity described in
section 212 is less than 25 percent of the
total time on such travel.
(3) Domestic travel excluded.--For purposes of this
subsection, travel outside the United States does not
include any travel from one point in the United States
to another point in the United States.
(d) Substantiation required.--No deduction or credit shall be
allowed--
(1) under section 162 or 212 for any traveling
expense (including meals and lodging while away from
home),
(2) for any expense for gifts, or
(3) with respect to any listed property (as defined
in section 280F(d)(4)),
unless the taxpayer substantiates by adequate records or by
sufficient evidence corroborating the taxpayer's own statement
(A) the amount of such expense or other item, (B) the time and
place of the travel or the date and description of the gift,
(C) the business purpose of the expense or other item, and (D)
the business relationship to the taxpayer of the person
receiving the benefit. The Secretary may by regulations provide
that some or all of the requirements of the preceding sentence
shall not apply in the case of an expense which does not exceed
an amount prescribed pursuant to such regulations. This
subsection shall not apply to any qualified nonpersonal use
vehicle (as defined in subsection (i)).
(e) Specific exceptions to application of subsection (a).--
Subsection (a) shall not apply to--
(1) Food and beverages for employees.--Expenses for
food and beverages (and facilities used in connection
therewith) furnished on the business premises of the
taxpayer primarily for his employees.
(2) Expenses treated as compensation.--
(A) In general.--Except as provided in
subparagraph (B), expenses for goods, services,
and facilities, to the extent that the expenses
are treated by the taxpayer, with respect to
the recipient of the entertainment, amusement,
or recreation, as compensation to an employee
on the taxpayer's return of tax under this
chapter and as wages to such employee for
purposes of chapter 24 (relating to withholding
of income tax at source on wages).
(B) Specified individuals.--
(i) In general.--In the case of a
recipient who is a specified
individual, subparagraph (A) and
paragraph (9) shall each be applied by
substituting ``to the extent that the
expenses do not exceed the amount of
the expenses which'' for ``to the
extent that the expenses''.
(ii) Specified individual.--For
purposes of clause (i), the term
``specified individual'' means any
individual who--
(I) is subject to the
requirements of section 16(a)
of the Securities Exchange Act
of 1934 with respect to the
taxpayer or a related party to
the taxpayer, or
(II) would be subject to such
requirements if the taxpayer
(or such related party) were an
issuer of equity securities
referred to in such section.
For purposes of this clause, a person is a
related party with respect to another person if
such person bears a relationship to such other
person described in section 267(b) or 707(b).
(3) Reimbursed expenses.--Expenses paid or incurred
by the taxpayer, in connection with the performance by
him of services for another person (whether or not such
other person is his employer), under a reimbursement or
other expense allowance arrangement with such other
person, but this paragraph shall apply--
(A) where the services are performed for an
employer, only if the employer has not treated
such expenses in the manner provided in
paragraph (2), or
(B) where the services are performed for a
person other than an employer, only if the
taxpayer accounts (to the extent provided by
subsection (d)) to such person.
(4) Recreational, etc., expenses for employees.--
Expenses for recreational, social, or similar
activities (including facilities therefor) primarily
for the benefit of employees (other than employees who
are highly compensated employees (within the meaning of
section 414(q))). For purposes of this paragraph, an
individual owning less than a 10-percent interest in
the taxpayer's trade or business shall not be
considered a shareholder or other owner, and for such
purposes an individual shall be treated as owning any
interest owned by a member of his family (within the
meaning of section 267(c)(4)). This paragraph shall not
apply for purposes of subsection (a)(3).
(5) Employees, stockholder, etc., business
meetings.--Expenses incurred by a taxpayer which are
directly related to business meetings of his employees,
stockholders, agents, or directors.
(6) Meetings of business leagues, etc..--Expenses
directly related and necessary to attendance at a
business meeting or convention of any organization
described in section 501(c)(6) (relating to business
leagues, chambers of commerce, real estate boards, and
boards of trade) and exempt from taxation under section
501(a).
(7) Items available to public.--Expenses for goods,
services, and facilities made available by the taxpayer
to the general public.
(8) Entertainment sold to customers.--Expenses for
goods or services (including the use of facilities)
which are sold by the taxpayer in a bona fide
transaction for an adequate and full consideration in
money or money's worth.
(9) Expenses includible in income of persons who are
not employees.--Expenses paid or incurred by the
taxpayer for goods, services, and facilities to the
extent that the expenses are includible in the gross
income of a recipient of the entertainment, amusement,
or recreation who is not an employee of the taxpayer as
compensation for services rendered or as a prize or
award under section 74. The preceding sentence shall
not apply to any amount paid or incurred by the
taxpayer if such amount is required to be included (or
would be so required except that the amount is less
than $600) in any information return filed by such
taxpayer under part III of subchapter A of chapter 61
and is not so included.
For purposes of this subsection, any item referred to in
subsection (a) shall be treated as an expense.
(f) Interest, taxes, casualty losses, etc..--This section
shall not apply to any deduction allowable to the taxpayer
without regard to its connection with his trade or business (or
with his income-producing activity). In the case of a taxpayer
which is not an individual, the preceding sentence shall be
applied as if it were an individual.
(g) Treatment of entertainment, etc., type facility.--For
purposes of this chapter, if deductions are disallowed under
subsection (a) with respect to any portion of a facility, such
portion shall be treated as an asset which is used for
personal, living, and family purposes (and not as an asset used
in the trade or business).
(h) Attendance at conventions, etc..--
(1) In general.--In the case of any individual who
attends a convention, seminar, or similar meeting which
is held outside the North American area, no deduction
shall be allowed under section 162 for expenses
allocable to such meeting unless the taxpayer
establishes that the meeting is directly related to the
active conduct of his trade or business and that, after
taking into account in the manner provided by
regulations prescribed by the Secretary--
(A) the purpose of such meeting and the
activities taking place at such meeting,
(B) the purposes and activities of the
sponsoring organizations or groups,
(C) the residences of the active members of
the sponsoring organization and the places at
which other meetings of the sponsoring
organization or groups have been held or will
be held, and
(D) such other relevant factors as the
taxpayer may present,
it is as reasonable for the meeting to be held outside
the North American area as within the North American
area.
(2) Conventions on cruise ships.--In the case of any
individual who attends a convention, seminar, or other
meeting which is held on any cruise ship, no deduction
shall be allowed under section 162 for expenses
allocable to such meeting, unless the taxpayer meets
the requirements of paragraph (5) and establishes that
the meeting is directly related to the active conduct
of his trade or business and that--
(A) the cruise ship is a vessel registered in
the United States; and
(B) all ports of call of such cruise ship are
located in the United States or in possessions
of the United States.
With respect to cruises beginning in any calendar year,
not more than $2,000 of the expenses attributable to an
individual attending one or more meetings may be taken
into account under section 162 by reason of the
preceding sentence.
(3) Definitions.--For purposes of this subsection--
(A) North American area.--The term ``North
American area'' means the United States, its
possessions, and the Trust Territory of the
Pacific Islands, and Canada and Mexico.
(B) Cruise ship.--The term ``cruise ship''
means any vessel sailing within or without the
territorial waters of the United States.
(4) Subsection to apply to employer as well as to
traveler.--
(A) Except as provided in subparagraph (B),
this subsection shall apply to deductions
otherwise allowable under section 162 to any
person, whether or not such person is the
individual attending the convention, seminar,
or similar meeting.
(B) This subsection shall not deny a
deduction to any person other than the
individual attending the convention, seminar,
or similar meeting with respect to any amount
paid by such person to or on behalf of such
individual if includible in the gross income of
such individual. The preceding sentence shall
not apply if the amount is required to be
included in any information return filed by
such person under part III of subchapter A of
chapter 61 and is not so included.
(5) Reporting requirements.--No deduction shall be
allowed under section 162 for expenses allocable to
attendance at a convention, seminar, or similar meeting
on any cruise ship unless the taxpayer claiming the
deduction attaches to the return of tax on which the
deduction is claimed--
(A) a written statement signed by the
individual attending the meeting which
includes--
(i) information with respect to the
total days of the trip, excluding the
days of transportation to and from the
cruise ship port, and the number of
hours of each day of the trip which
such individual devoted to scheduled
business activities,
(ii) a program of the scheduled
business activities of the meeting, and
(iii) such other information as may
be required in regulations prescribed
by the Secretary; and
(B) a written statement signed by an officer
of the organization or group sponsoring the
meeting which includes--
(i) a schedule of the business
activities of each day of the meeting,
(ii) the number of hours which the
individual attending the meeting
attended such scheduled business
activities, and
(iii) such other information as may
be required in regulations prescribed
by the Secretary.
(6) Treatment of conventions in certain Caribbean
countries.--
(A) In general.--For purposes of this
subsection, the term ``North American area''
includes, with respect to any convention,
seminar, or similar meeting, any beneficiary
country if (as of the time such meeting
begins)--
(i) there is in effect a bilateral or
multilateral agreement described in
subparagraph (C) between such country
and the United States providing for the
exchange of information between the
United States and such country, and
(ii) there is not in effect a finding
by the Secretary that the tax laws of
such country discriminate against
conventions held in the United States.
(B) Beneficiary country.--For purposes of
this paragraph, the term ``beneficiary
country'' has the meaning given to such term by
section 212(a)(1)(A) of the Caribbean Basin
Economic Recovery Act; except that such term
shall include Bermuda.
(C) Authority to conclude exchange of
information agreements.--
(i) In general.--The Secretary is
authorized to negotiate and conclude an
agreement for the exchange of
information with any beneficiary
country. Except as provided in clause
(ii), an exchange of information
agreement shall provide for the
exchange of such information (not
limited to information concerning
nationals or residents of the United
States or the beneficiary country) as
may be necessary or appropriate to
carry out and enforce the tax laws of
the United States and the beneficiary
country (whether criminal or civil
proceedings), including information
which may otherwise be subject to
nondisclosure provisions of the local
law of the beneficiary country such as
provisions respecting bank secrecy and
bearer shares. The exchange of
information agreement shall be
terminable by either country on
reasonable notice and shall provide
that information received by either
country will be disclosed only to
persons or authorities (including
courts and administrative bodies)
involved in the administration or
oversight of, or in the determination
of appeals in respect of, taxes of the
United States or the beneficiary
country and will be used by such
persons or authorities only for such
purposes.
(ii) Nondisclosure of qualified
confidential information sought for
civil tax purposes.--An exchange of
information agreement need not provide
for the exchange of qualified
confidential information which is
sought only for civil tax purposes if--
(I) the Secretary of the
Treasury, after making all
reasonable efforts to negotiate
an agreement which includes the
exchange of such information,
determines that such an
agreement cannot be negotiated
but that the agreement which
was negotiated will
significantly assist in the
administration and enforcement
of the tax laws of the United
States, and
(II) the President determines
that the agreement as
negotiated is in the national
security interest of the United
States.
(iii) Qualified confidential
information defined.--For purposes of
this subparagraph, the term ``qualified
confidential information'' means
information which is subject to the
nondisclosure provisions of any local
law of the beneficiary country
regarding bank secrecy or ownership of
bearer shares.
(iv) Civil tax purposes.--For
purposes of this subparagraph, the
determination of whether information is
sought only for civil tax purposes
shall be made by the requesting party.
(D) Coordination with other provisions.--Any
exchange of information agreement negotiated
under subparagraph (C) shall be treated as an
income tax convention for purposes of section
6103(k)(4). The Secretary may exercise his
authority under subchapter A of chapter 78 to
carry out any obligation of the United States
under an agreement referred to in subparagraph
(C).
(E) Determinations published in the Federal
Register.--The following shall be published in
the Federal Register--
(i) any determination by the
President under subparagraph (C)(ii)
(including the reasons for such
determination),
(ii) any determination by the
Secretary under subparagraph (C)(ii)
(including the reasons for such
determination), and
(iii) any finding by the Secretary
under subparagraph (A)(ii) (and any
termination thereof).
(7) Seminars, etc. for section 212 purposes.--No
deduction shall be allowed under section 212 for
expenses allocable to a convention, seminar, or similar
meeting.
(i) Qualified nonpersonal use vehicle.--For purposes of
subsection (d), the term ``qualified nonpersonal use vehicle''
means any vehicle which, by reason of its nature, is not likely
to be used more than a de minimis amount for personal purposes.
(j) Employee achievement awards.--
(1) General rule.--No deduction shall be allowed
under section 162 or section 212 for the cost of an
employee achievement award except to the extent that
such cost does not exceed the deduction limitations of
paragraph (2).
(2) Deduction limitations.--The deduction for the
cost of an employee achievement award made by an
employer to an employee--
(A) which is not a qualified plan award, when
added to the cost to the employer for all other
employee achievement awards made to such
employee during the taxable year which are not
qualified plan awards, shall not exceed $400,
and
(B) which is a qualified plan award, when
added to the cost to the employer for all other
employee achievement awards made to such
employee during the taxable year (including
employee achievement awards which are not
qualified plan awards), shall not exceed
$1,600.
(3) Definitions.--For purposes of this subsection--
(A) Employee achievement award.--
(i) In general.--The term ``employee
achievement award'' means an item of
tangible personal property which is--
(I) transferred by an
employer to an employee for
length of service achievement
or safety achievement,
(II) awarded as part of a
meaningful presentation, and
(III) awarded under
conditions and circumstances
that do not create a
significant likelihood of the
payment of disguised
compensation.
(ii) Tangible personal property.--For
purposes of clause (i), the term
``tangible personal property'' shall
not include--
(I) cash, cash equivalents,
gift cards, gift coupons, or
gift certificates (other than
arrangements conferring only
the right to select and receive
tangible personal property from
a limited array of such items
pre-selected or pre-approved by
the employer), or
(II) vacations, meals,
lodging, tickets to theater or
sporting events, stocks, bonds,
other securities, and other
similar items.
(B) Qualified plan award.--
(i) In general.--The term ``qualified
plan award'' means an employee
achievement award awarded as part of an
established written plan or program of
the taxpayer which does not
discriminate in favor of highly
compensated employees (within the
meaning of section 414(q)) as to
eligibility or benefits.
(ii) Limitation.--An employee
achievement award shall not be treated
as a qualified plan award for any
taxable year if the average cost of all
employee achievement awards which are
provided by the employer during the
year, and which would be qualified plan
awards but for this subparagraph,
exceeds $400. For purposes of the
preceding sentence, average cost shall
be determined by including the entire
cost of qualified plan awards, without
taking into account employee
achievement awards of nominal value.
(4) Special rules.--For purposes of this subsection--
(A) Partnerships.--In the case of an employee
achievement award made by a partnership, the
deduction limitations contained in paragraph
(2) shall apply to the partnership as well as
to each member thereof.
(B) Length of service awards.--An item shall
not be treated as having been provided for
length of service achievement if the item is
received during the recipient's 1st 5 years of
employment or if the recipient received a
length of service achievement award (other than
an award excludable under section 132(e)(1))
during that year or any of the prior 4 years.
(C) Safety achievement awards.--An item
provided by an employer to an employee shall
not be treated as having been provided for
safety achievement if--
(i) during the taxable year, employee
achievement awards (other than awards
excludable under section 132(e)(1)) for
safety achievement have previously been
awarded by the employer to more than 10
percent of the employees of the
employer (excluding employees described
in clause (ii)), or
(ii) such item is awarded to a
manager, administrator, clerical
employee, or other professional
employee.
(k) Business meals.--
(1) In general.--No deduction shall be allowed under
this chapter for the expense of any food or beverages
unless--
(A) such expense is not lavish or extravagant
under the circumstances, and
(B) the taxpayer (or an employee of the
taxpayer) is present at the furnishing of such
food or beverages.
(2) Exceptions.--Paragraph (1) shall not apply to--
(A) any expense described in paragraph (2),
(3), (4), (7), (8), or (9) of subsection (e),
and
(B) any other expense to the extent provided
in regulations.
(l) Transportation and commuting benefits.--
(1) In general.--No deduction shall be allowed under
this chapter for any expense incurred for providing any
transportation, or any payment or reimbursement, to an
employee of the taxpayer in connection with travel
between the employee's residence and place of
employment, except as necessary for ensuring the safety
of the employee.
(2) Exception.--In the case of any qualified bicycle
commuting reimbursement (as described in section
132(f)(5)(F)), this subsection shall not apply for any
amounts paid or incurred after December 31, 2017, and
before January 1, 2026.
(m) Additional limitations on travel expenses.--
(1) Luxury water transportation.--
(A) In general.--No deduction shall be
allowed under this chapter for expenses
incurred for transportation by water to the
extent such expenses exceed twice the aggregate
per diem amounts for days of such
transportation. For purposes of the preceding
sentence, the term ``per diem amounts'' means
the highest amount generally allowable with
respect to a day to employees of the executive
branch of the Federal Government for per diem
while away from home but serving in the United
States.
(B) Exceptions.--Subparagraph (A) shall not
apply to--
(i) any expense allocable to a
convention, seminar, or other meeting
which is held on any cruise ship, and
(ii) any expense described in
paragraph (2), (3), (4), (7), (8), or
(9) of subsection (e).
(2) Travel as form of education.--No deduction shall
be allowed under this chapter for expenses for travel
as a form of education.
(3) Travel expenses of spouse, dependent, or
others.--No deduction shall be allowed under this
chapter (other than section 217) for travel expenses
paid or incurred with respect to a spouse, dependent,
or other individual accompanying the taxpayer (or an
officer or employee of the taxpayer) on business
travel, unless--
(A) the spouse, dependent, or other
individual is an employee of the taxpayer,
(B) the travel of the spouse, dependent, or
other individual is for a bona fide business
purpose, and
(C) such expenses would otherwise be
deductible by the spouse, dependent, or other
individual.
(n) Only 50 percent of meal expenses allowed as deduction.--
(1) In general.--The amount allowable as a deduction
under this chapter for any expense for food or
beverages shall not exceed 50 percent of the amount of
such expense which would (but for this paragraph) be
allowable as a deduction under this chapter.
(2) Exceptions.--Paragraph (1) shall not apply to any
expense if--
(A) such expense is described in paragraph
(2), (3), (4), (7), (8), or (9) of subsection
(e),
(B) in the case of an employer who pays or
reimburses moving expenses of an employee, such
expenses are includible in the income of the
employee under section 82, or
(C) such expense is for food or beverages--
(i) required by any Federal law to be
provided to crew members of a
commercial vessel,
(ii) provided to crew members of a
commercial vessel--
(I) which is operating on the
Great Lakes, the Saint Lawrence
Seaway, or any inland waterway
of the United States, and
(II) which is of a kind which
would be required by Federal
law to provide food and
beverages to crew members if it
were operated at sea,
(iii) provided on an oil or gas
platform or drilling rig if the
platform or rig is located offshore, or
(iv) provided on an oil or gas
platform or drilling rig, or at a
support camp which is in proximity and
integral to such platform or rig, if
the platform or rig is located in the
United States north of 54 degrees north
latitude.
Clauses (i) and (ii) of subparagraph (C) shall not
apply to vessels primarily engaged in providing luxury
water transportation (determined under the principles
of subsection (m)). In the case of the employee, the
exception of subparagraph (A) shall not apply to
expenses described in subparagraph (B).
(3) Special rule for individuals subject to Federal
hours of service.--In the case of any expenses for food
or beverages consumed while away from home (within the
meaning of section 162(a)(2)) by an individual during,
or incident to, the period of duty subject to the hours
of service limitations of the Department of
Transportation, paragraph (1) shall be applied by
substituting ``80 percent'' for ``50 percent''.
(o) Regulatory authority.--The Secretary shall prescribe
such regulations as he may deem necessary to carry out the
purposes of this section, including regulations prescribing
whether subsection (a) or subsection (b) applies in cases where
both such subsections would otherwise apply.
Subchapter C--CORPORATE DISTRIBUTIONS AND ADJUSTMENTS
* * * * * * *
PART I--DISTRIBUTIONS BY CORPORATIONS
* * * * * * *
Subpart C--DEFINITIONS; CONSTRUCTIVE OWNERSHIP OF STOCK
* * * * * * *
SEC. 318. CONSTRUCTIVE OWNERSHIP OF STOCK.
(a) General rule.--For purposes of those provisions of this
subchapter to which the rules contained in this section are
expressly made applicable--
(1) Members of family.--
(A) In general.--An individual shall be
considered as owning the stock owned, directly
or indirectly, by or for--
(i) [his spouse] the individual's
spouse (other than a spouse who is
legally separated from the individual
under a decree of divorce or separate
maintenance), and
(ii) [his] the individual's children,
grandchildren, and parents.
(B) Effect of adoption.--For purposes of
subparagraph (A)(ii), a legally adopted child
of an individual shall be treated as a child of
such individual by blood.
(2) Attribution from partnerships, estates, trusts,
and corporations.--
(A) From partnerships and estates.--Stock
owned, directly or indirectly, by or for a
partnership or estate shall be considered as
owned proportionately by its partners or
beneficiaries.
(B) From trusts.--
(i) Stock owned, directly or
indirectly, by or for a trust (other
than an employees' trust described in
section 401(a) which is exempt from tax
under section 501(a)) shall be
considered as owned by its
beneficiaries in proportion to the
actuarial interest of such
beneficiaries in such trust.
(ii) Stock owned, directly or
indirectly, by or for any portion of a
trust of which a person is considered
the owner under subpart E of part I of
subchapter J (relating to grantors and
others treated as substantial owners)
shall be considered as owned by such
person.
(C) From corporations.--If 50 percent or more
in value of the stock in a corporation is
owned, directly or indirectly, by or for any
person, such person shall be considered as
owning the stock owned, directly or indirectly,
by or for such corporation, in that proportion
which the value of the stock which such person
so owns bears to the value of all the stock in
such corporation.
(3) Attribution to partnerships, estates, trusts, and
corporations.--
(A) To partnerships and estates.--Stock
owned, directly or indirectly, by or for a
partner or a beneficiary of an estate shall be
considered as owned by the partnership or
estate.
(B) To trusts.--
(i) Stock owned, directly or
indirectly, by or for a beneficiary of
a trust (other than an employees' trust
described in section 401(a) which is
exempt from tax under section 501(a))
shall be considered as owned by the
trust, unless such beneficiary's
interest in the trust is a remote
contingent interest. For purposes of
this clause, a contingent interest of a
beneficiary in a trust shall be
considered remote if, under the maximum
exercise of discretion by the trustee
in favor of such beneficiary, the value
of such interest, computed actuarially,
is 5 percent or less of the value of
the trust property.
(ii) Stock owned, directly or
indirectly, by or for a person who is
considered the owner of any portion of
a trust under subpart E of part I of
subchapter J (relating to grantors and
others treated as substantial owners)
shall be considered as owned by the
trust.
(C) To corporations.--If 50 percent or more
in value of the stock in a corporation is
owned, directly or indirectly, by or for any
person, such corporation shall be considered as
owning the stock owned, directly or indirectly,
by or for such person.
(4) Options.--If any person has an option to acquire
stock, such stock shall be considered as owned by such
person. For purposes of this paragraph, an option to
acquire such an option, and each one of a series of
such options, shall be considered as an option to
acquire such stock.
(5) Operating rules.--
(A) In general.--Except as provided in
subparagraphs (B) and (C), stock constructively
owned by a person by reason of the application
of paragraph (1), (2), (3), or (4), shall, for
purposes of applying paragraphs (1), (2), (3),
and (4), be considered as actually owned by
such person.
(B) Members of family.--Stock constructively
owned by an individual by reason of the
application of paragraph (1) shall not be
considered as owned by him for purposes of
again applying paragraph (1) in order to make
another the constructive owner of such stock.
(C) Partnerships, estates, trusts, and
corporations.--Stock constructively owned by a
partnership, estate, trust, or corporation by
reason of the application of paragraph (3)
shall not be considered as owned by it for
purposes of applying paragraph (2) in order to
make another the constructive owner of such
stock.
(D) Option rule in lieu of family rule.--For
purposes of this paragraph, if stock may be
considered as owned by an individual under
paragraph (1) or (4), it shall be considered as
owned by him under paragraph (4).
(E) S corporation treated as partnership.--
For purposes of this subsection--
(i) an S corporation shall be treated
as a partnership, and
(ii) any shareholder of the S
corporation shall be treated as a
partner of such partnership.
The preceding sentence shall not apply for
purposes of determining whether stock in the S
corporation is constructively owned by any
person.
(b) Cross references.--For provisions to which the rules
contained in subsection (a) apply, see--
(1) section 302 (relating to redemption of
stock);
(2) section 304 (relating to redemption by
related corporations);
(3) section 306(b)(1)(A) (relating to
disposition of section 306 stock);
(4) section 338(h)(3) (defining purchase);
(5) section 382(l)(3) (relating to special
limitations on net operating loss carryovers);
(6) section 856(d) (relating to definition of
rents from real property in the case of real
estate investment trusts);
(7) section 958(b) (relating to constructive
ownership rules with respect to controlled
foreign corporations); and
(8) section 6038(e)(2) (relating to
information with respect to certain foreign
corporations).
Subchapter D--DEFERRED COMPENSATION, ETC.
* * * * * * *
PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC.
* * * * * * *
Subpart A--GENERAL RULE
* * * * * * *
SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS PLANS.
(a) Requirements for qualification.--A trust created or
organized in the United States and forming part of a stock
bonus, pension, or profit-sharing plan of an employer for the
exclusive benefit of his employees or their beneficiaries shall
constitute a qualified trust under this section--
(1) if contributions are made to the trust by such
employer, or employees, or both, or by another employer
who is entitled to deduct his contributions under
section 404(a)(3)(B) (relating to deduction for
contributions to profit-sharing and stock bonus plans),
or by a charitable remainder trust pursuant to a
qualified gratuitous transfer (as defined in section
664(g)(1)), for the purpose of distributing to such
employees or their beneficiaries the corpus and income
of the fund accumulated by the trust in accordance with
such plan;
(2) if under the trust instrument it is impossible,
at any time prior to the satisfaction of all
liabilities with respect to employees and their
beneficiaries under the trust, for any part of the
corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other
than for the exclusive benefit of his employees or
their beneficiaries (but this paragraph shall not be
construed, in the case of a multiemployer plan, to
prohibit the return of a contribution within 6 months
after the plan administrator determines that the
contribution was made by a mistake of fact or law
(other than a mistake relating to whether the plan is
described in section 401(a) or the trust which is part
of such plan is exempt from taxation under section
501(a), or the return of any withdrawal liability
payment determined to be an overpayment within 6 months
of such determination));
(3) if the plan of which such trust is a part
satisfies the requirements of section 410 (relating to
minimum participation standards); and
(4) if the contributions or benefits provided under
the plan do not discriminate in favor of highly
compensated employees (within the meaning of section
414(q)). For purposes of this paragraph, there shall be
excluded from consideration employees described in
section 410(b)(3)(A) and (C).
(5) Special rules relating to nondiscrimination
requirements.--
(A) Salaried or clerical employees.--A
classification shall not be considered
discriminatory within the meaning of paragraph
(4) or section 410(b)(2)(A)(i) merely because
it is limited to salaried or clerical
employees.
(B) Contributions and benefits may bear
uniform relationship to compensation.--A plan
shall not be considered discriminatory within
the meaning of paragraph (4) merely because the
contributions or benefits of, or on behalf of,
the employees under the plan bear a uniform
relationship to the compensation (within the
meaning of section 414(s)) of such employees.
(C) Certain disparity permitted.--A plan
shall not be considered discriminatory within
the meaning of paragraph (4) merely because the
contributions or benefits of, or on behalf of,
the employees under the plan favor highly
compensated employees (as defined in section
414(q)) in the manner permitted under
subsection (l).
(D) Integrated defined benefit plan.--
(i) In general.--A defined benefit
plan shall not be considered
discriminatory within the meaning of
paragraph (4) merely because the plan
provides that the employer-derived
accrued retirement benefit for any
participant under the plan may not
exceed the excess (if any) of--
(I) the participant's final
pay with the employer, over
(II) the employer-derived
retirement benefit created
under Federal law attributable
to service by the participant
with the employer.
For purposes of this clause, the employer-
derived retirement benefit created under
Federal law shall be treated as accruing
ratably over 35 years.
(ii) Final pay.--For purposes of this
subparagraph, the participant's final
pay is the compensation (as defined in
section 414(q)(4)) paid to the
participant by the employer for any
year--
(I) which ends during the 5-
year period ending with the
year in which the participant
separated from service for the
employer, and
(II) for which the
participant's total
compensation from the employer
was highest.
(E) 2 or more plans treated as single plan.--
For purposes of determining whether 2 or more
plans of an employer satisfy the requirements
of paragraph (4) when considered as a single
plan--
(i) Contributions.--If the amount of
contributions on behalf of the
employees allowed as a deduction under
section 404 for the taxable year with
respect to such plans, taken together,
bears a uniform relationship to the
compensation (within the meaning of
section 414(s)) of such employees, the
plans shall not be considered
discriminatory merely because the
rights of employees to, or derived
from, the employer contributions under
the separate plans do not become
nonforfeitable at the same rate.
(ii) Benefits.--If the employees'
rights to benefits under the separate
plans do not become nonforfeitable at
the same rate, but the levels of
benefits provided by the separate plans
satisfy the requirements of regulations
prescribed by the Secretary to take
account of the differences in such
rates, the plans shall not be
considered discriminatory merely
because of the difference in such
rates.
(F) Social security retirement age.--For
purposes of testing for discrimination under
paragraph (4)--
(i) the social security retirement
age (as defined in section 415(b)(8))
shall be treated as a uniform
retirement age, and
(ii) subsidized early retirement
benefits and joint and survivor
annuities shall not be treated as being
unavailable to employees on the same
terms merely because such benefits or
annuities are based in whole or in part
on an employee's social security
retirement age (as so defined).
(G) Governmental plans.--Paragraphs (3) and
(4) shall not apply to a governmental plan
(within the meaning of section 414(d)).
(6) A plan shall be considered as meeting the
requirements of paragraph (3) during the whole of any
taxable year of the plan if on one day in each quarter
it satisfied such requirements.
(7) A trust shall not constitute a qualified trust
under this section unless the plan of which such trust
is a part satisfies the requirements of section 411
(relating to minimum vesting standards).
(8) A trust forming part of a defined benefit plan
shall not constitute a qualified trust under this
section unless the plan provides that forfeitures must
not be applied to increase the benefits any employee
would otherwise receive under the plan.
(9) Required distributions.--
(A) In general.--A trust shall not constitute
a qualified trust under this subsection unless
the plan provides that the entire interest of
each employee--
(i) will be distributed to such
employee not later than the required
beginning date, or
(ii) will be distributed, beginning
not later than the required beginning
date, in accordance with regulations,
over the life of such employee or over
the lives of such employee and a
designated beneficiary (or over a
period not extending beyond the life
expectancy of such employee or the life
expectancy of such employee and a
designated beneficiary).
(B) Required distribution where employee dies
before entire interest is distributed.--
(i) Where distributions have begun
under subparagraph (A)(ii).--A trust
shall not constitute a qualified trust
under this section unless the plan
provides that if--
(I) the distribution of the
employee's interest has begun
in accordance with subparagraph
(A)(ii), and
(II) the employee dies before
his entire interest has been
distributed to him,
the remaining portion of such interest will be
distributed at least as rapidly as under the
method of distributions being used under
subparagraph (A)(ii) as of the date of his
death.
(ii) 5-year rule for other cases.--A
trust shall not constitute a qualified
trust under this section unless the
plan provides that, if an employee dies
before the distribution of the
employee's interest has begun in
accordance with subparagraph (A)(ii),
the entire interest of the employee
will be distributed within 5 years
after the death of such employee.
(iii) Exception to 5-year rule for
certain amounts payable over life of
beneficiary.--If--
(I) any portion of the
employee's interest is payable
to (or for the benefit of) a
designated beneficiary,
(II) such portion will be
distributed (in accordance with
regulations) over the life of
such designated beneficiary (or
over a period not extending
beyond the life expectancy of
such beneficiary), and
(III) such distributions
begin not later than 1 year
after the date of the
employee's death or such later
date as the Secretary may by
regulations prescribe,
for purposes of clause (ii), the portion
referred to in subclause (I) shall be treated
as distributed on the date on which such
distributions begin.
(iv) Special rule for surviving
spouse of employee.--If the designated
beneficiary referred to in clause
(iii)(I) is the surviving spouse of the
employee--
(I) the date on which the
distributions are required to
begin under clause (iii)(III)
shall not be earlier than the
date on which the employee
would have attained age 701/2,
and
(II) if the surviving spouse
dies before the distributions
to such spouse begin, this
subparagraph shall be applied
as if the surviving spouse were
the employee.
(C) Required beginning date.--For purposes of
this paragraph--
(i) In general.--The term ``required
beginning date'' means April 1 of the
calendar year following the later of--
(I) the calendar year in
which the employee attains age
701/2, or
(II) the calendar year in
which the employee retires.
(ii) Exception.--Subclause (II) of
clause (i) shall not apply--
(I) except as provided in
section 409(d), in the case of
an employee who is a 5-percent
owner (as defined in section
416) with respect to the plan
year ending in the calendar
year in which the employee
attains age 701/2, or
(II) for purposes of section
408(a)(6) or (b)(3).
(iii) Actuarial adjustment.--In the
case of an employee to whom clause
(i)(II) applies who retires in a
calendar year after the calendar year
in which the employee attains age 701/
2, the employee's accrued benefit shall
be actuarially increased to take into
account the period after age 701/2 in
which the employee was not receiving
any benefits under the plan.
(iv) Exception for governmental and
church plans.--Clauses (ii) and (iii)
shall not apply in the case of a
governmental plan or church plan. For
purposes of this clause, the term
``church plan'' means a plan maintained
by a church for church employees, and
the term ``church'' means any church
(as defined in section 3121(w)(3)(A))
or qualified church-controlled
organization (as defined in section
3121(w)(3)(B)).
(D) Life expectancy.--For purposes of this
paragraph, the life expectancy of an employee
and the employee's spouse (other than in the
case of a life annuity) may be redetermined but
not more frequently than annually.
(E) Designated beneficiary.--For purposes of
this paragraph, the term ``designated
beneficiary'' means any individual designated
as a beneficiary by the employee.
(F) Treatment of payments to children.--Under
regulations prescribed by the Secretary, for
purposes of this paragraph, any amount paid to
a child shall be treated as if it had been paid
to the surviving spouse if such amount will
become payable to the surviving spouse upon
such child reaching majority (or other
designated event permitted under regulations).
(G) Treatment of incidental death benefit
distributions.--For purposes of this title, any
distribution required under the incidental
death benefit requirements of this subsection
shall be treated as a distribution required
under this paragraph.
(10) Other requirements.--
(A) Plans benefiting owner-employees.--In the
case of any plan which provides contributions
or benefits for employees some or all of whom
are owner-employees (as defined in subsection
(c)(3)), a trust forming part of such plan
shall constitute a qualified trust under this
section only if the requirements of subsection
(d) are also met.
(B) Top-heavy plans.--
(i) In general.--In the case of any
top-heavy plan, a trust forming part of
such plan shall constitute a qualified
trust under this section only if the
requirements of section 416 are met.
(ii) Plans which may become top-
heavy.--Except to the extent provided
in regulations, a trust forming part of
a plan (whether or not a top-heavy
plan) shall constitute a qualified
trust under this section only if such
plan contains provisions--
(I) which will take effect if
such plan becomes a top-heavy
plan, and
(II) which meet the
requirements of section 416.
(iii) Exemption for governmental
plans.--This subparagraph shall not
apply to any governmental plan.
(11) Requirement of joint and survivor annuity and
preretirement survivor annuity.--
(A) In general.--In the case of any plan to
which this paragraph applies, except as
provided in section 417, a trust forming part
of such plan shall not constitute a qualified
trust under this section unless--
(i) in the case of a vested
participant who does not die before the
annuity starting date, the accrued
benefit payable to such participant is
provided in the form of a qualified
joint and survivor annuity, and
(ii) in the case of a vested
participant who dies before the annuity
starting date and who has a surviving
spouse, a qualified preretirement
survivor annuity is provided to the
surviving spouse of such participant.
(B) Plans to which paragraph applies.--This
paragraph shall apply to--
(i) any defined benefit plan,
(ii) any defined contribution plan
which is subject to the funding
standards of section 412, and
(iii) any participant under any other
defined contribution plan unless--
(I) such plan provides that
the participant's
nonforfeitable accrued benefit
(reduced by any security
interest held by the plan by
reason of a loan outstanding to
such participant) is payable in
full, on the death of the
participant, to the
participant's surviving spouse
(or, if there is no surviving
spouse or the surviving spouse
consents in the manner required
under section 417(a)(2), to a
designated beneficiary),
(II) such participant does
not elect a payment of benefits
in the form of a life annuity,
and
(III) with respect to such
participant, such plan is not a
direct or indirect transferee
(in a transfer after December
31, 1984) of a plan which is
described in clause (i) or (ii)
or to which this clause applied
with respect to the
participant.
Clause (iii)(III) shall apply only with respect
to the transferred assets (and income
therefrom) if the plan separately accounts for
such assets and any income therefrom.
(C) Exception for certain ESOP benefits.--
(i) In general.--In the case of--
(I) a tax credit employee
stock ownership plan (as
defined in section 409(a)), or
(II) an employee stock
ownership plan (as defined in
section 4975(e)(7)),
subparagraph (A) shall not apply to that
portion of the employee's accrued benefit to
which the requirements of section 409(h) apply.
(ii) Nonforfeitable benefit must be
paid in full, etc.--In the case of any
participant, clause (i) shall apply
only if the requirements of subclauses
(I), (II), and (III) of subparagraph
(B)(iii) are met with respect to such
participant.
(D) Special rule where participant and spouse
married less than 1 year.--A plan shall not be
treated as failing to meet the requirements of
subparagraphs (B)(iii) or (C) merely because
the plan provides that benefits will not be
payable to the surviving spouse of the
participant unless the participant and such
spouse had been married throughout the 1-year
period ending on the earlier of the
participant's annuity starting date or the date
of the participant's death.
(E) Exception for plans described in section
404(c).--This paragraph shall not apply to a
plan which the Secretary has determined is a
plan described in section 404(c) (or a
continuation thereof) in which participation is
substantially limited to individuals who,
before January 1, 1976, ceased employment
covered by the plan.
(F) Cross reference.--For--
(i) provisions under which
participants may elect to waive the
requirements of this paragraph, and
(ii) other definitions and special
rules for purposes of this paragraph,
see section 417.
(12) A trust shall not constitute a qualified trust
under this section unless the plan of which such trust
is a part provides that in the case of any merger or
consolidation with, or transfer of assets or
liabilities to, any other plan after September 2, 1974,
each participant in the plan would (if the plan then
terminated) receive a benefit immediately after the
merger, consolidation, or transfer which is equal to or
greater than the benefit he would have been entitled to
receive immediately before the merger, consolidation,
or transfer (if the plan had then terminated). The
preceding sentence does not apply to any multiemployer
plan with respect to any transaction to the extent that
participants either before or after the transaction are
covered under a multiemployer plan to which title IV of
the Employee Retirement Income Security Act of 1974
applies.
(13) Assignment and alienation.--
(A) In general.--A trust shall not constitute
a qualified trust under this section unless the
plan of which such trust is a part provides
that benefits provided under the plan may not
be assigned or alienated. For purposes of the
preceding sentence, there shall not be taken
into account any voluntary and revocable
assignment of not to exceed 10 percent of any
benefit payment made by any participant who is
receiving benefits under the plan unless the
assignment or alienation is made for purposes
of defraying plan administration costs. For
purposes of this paragraph a loan made to a
participant or beneficiary shall not be treated
as an assignment or alienation if such loan is
secured by the participant's accrued
nonforfeitable benefit and is exempt from the
tax imposed by section 4975 (relating to tax on
prohibited transactions) by reason of section
4975(d)(1). This paragraph shall take effect on
January 1, 1976 and shall not apply to
assignments which were irrevocable on September
2, 1974.
(B) Special rules for domestic relations
orders.--Subparagraph (A) shall apply to the
creation, assignment, or recognition of a right
to any benefit payable with respect to a
participant pursuant to a domestic relations
order, except that subparagraph (A) shall not
apply if the order is determined to be a
qualified domestic relations order.
(C) Special rule for certain judgments and
settlements.--Subparagraph (A) shall not apply
to any offset of a participant's benefits
provided under a plan against an amount that
the participant is ordered or required to pay
to the plan if--
(i) the order or requirement to pay
arises--
(I) under a judgment of
conviction for a crime
involving such plan,
(II) under a civil judgment
(including a consent order or
decree) entered by a court in
an action brought in connection
with a violation (or alleged
violation) of part 4 of
subtitle B of title I of the
Employee Retirement Income
Security Act of 1974, or
(III) pursuant to a
settlement agreement between
the Secretary of Labor and the
participant, or a settlement
agreement between the Pension
Benefit Guaranty Corporation
and the participant, in
connection with a violation (or
alleged violation) of part 4 of
such subtitle by a fiduciary or
any other person,
(ii) the judgment, order, decree, or
settlement agreement expressly provides
for the offset of all or part of the
amount ordered or required to be paid
to the plan against the participant's
benefits provided under the plan, and
(iii) in a case in which the survivor
annuity requirements of section
401(a)(11) apply with respect to
distributions from the plan to the
participant, if the participant has a
spouse at the time at which the offset
is to be made--
(I) either such spouse has
consented in writing to such
offset and such consent is
witnessed by a notary public or
representative of the plan (or
it is established to the
satisfaction of a plan
representative that such
consent may not be obtained by
reason of circumstances
described in section
417(a)(2)(B)), or an election
to waive the right of the
spouse to either a qualified
joint and survivor annuity or a
qualified preretirement
survivor annuity is in effect
in accordance with the
requirements of section 417(a),
(II) such spouse is ordered
or required in such judgment,
order, decree, or settlement to
pay an amount to the plan in
connection with a violation of
part 4 of such subtitle, or
(III) in such judgment,
order, decree, or settlement,
such spouse retains the right
to receive the survivor annuity
under a qualified joint and
survivor annuity provided
pursuant to section
401(a)(11)(A)(i) and under a
qualified preretirement
survivor annuity provided
pursuant to section
401(a)(11)(A)(ii), determined
in accordance with subparagraph
(D).
A plan shall not be treated as failing to meet
the requirements of this subsection, subsection
(k), section 403(b), or section 409(d) solely
by reason of an offset described in this
subparagraph.
(D) Survivor annuity.--
(i) In general.--The survivor annuity
described in subparagraph (C)(iii)(III)
shall be determined as if--
(I) the participant
terminated employment on the
date of the offset,
(II) there was no offset,
(III) the plan permitted
commencement of benefits only
on or after normal retirement
age,
(IV) the plan provided only
the minimum-required qualified
joint and survivor annuity, and
(V) the amount of the
qualified preretirement
survivor annuity under the plan
is equal to the amount of the
survivor annuity payable under
the minimum-required qualified
joint and survivor annuity.
(ii) Definition.--For purposes of
this subparagraph, the term ``minimum-
required qualified joint and survivor
annuity'' means the qualified joint and
survivor annuity which is the actuarial
equivalent of the participant's accrued
benefit (within the meaning of section
411(a)(7)) and under which the survivor
annuity is 50 percent of the amount of
the annuity which is payable during the
joint lives of the participant and the
spouse.
(14) A trust shall not constitute a qualified trust
under this section unless the plan of which such trust
is a part provides that, unless the participant
otherwise elects, the payment of benefits under the
plan to the participant will begin not later than the
60th day after the latest of the close of the plan year
in which--
(A) the date on which the participant attains
the earlier of age 65 or the normal retirement
age specified under the plan,
(B) occurs the 10th anniversary of the year
in which the participant commenced
participation in the plan, or
(C) the participant terminates his service
with the employer.
In the case of a plan which provides for the payment of
an early retirement benefit, a trust forming a part of
such plan shall not constitute a qualified trust under
this section unless a participant who satisfied the
service requirements for such early retirement benefit,
but separated from the service (with any nonforfeitable
right to an accrued benefit) before satisfying the age
requirement for such early retirement benefit, is
entitled upon satisfaction of such age requirement to
receive a benefit not less than the benefit to which he
would be entitled at the normal retirement age,
actuarially, reduced under regulations prescribed by
the Secretary.
(15) A trust shall not constitute a qualified trust
under this section unless under the plan of which such
trust is a part--
(A) in the case of a participant or
beneficiary who is receiving benefits under
such plan, or
(B) in the case of a participant who is
separated from the service and who has
nonforfeitable rights to benefits,
such benefits are not decreased by reason of any
increase in the benefit levels payable under title II
of the Social Security Act or any increase in the wage
base under such title II, if such increase takes place
after September 2, 1974, or (if later) the earlier of
the date of first receipt of such benefits or the date
of such separation, as the case may be.
(16) A trust shall not constitute a qualified trust
under this section if the plan of which such trust is a
part provides for benefits or contributions which
exceed the limitations of section 415.
(17) Compensation limit.--
(A) In general.--A trust shall not constitute
a qualified trust under this section unless,
under the plan of which such trust is a part,
the annual compensation of each employee taken
into account under the plan for any year does
not exceed $200,000.
(B) Cost-of-living adjustment.--The Secretary
shall adjust annually the $200,000 amount in
subparagraph (A) for increases in the cost-of-
living at the same time and in the same manner
as adjustments under section 415(d); except
that the base period shall be the calendar
quarter beginning July 1, 2001, and any
increase which is not a multiple of $5,000
shall be rounded to the next lowest multiple of
$5,000.
(19) A trust shall not constitute a qualified trust
under this section if under the plan of which such
trust is a part any part of a participant's accrued
benefit derived from employer contributions (whether or
not otherwise nonforfeitable), is forfeitable solely
because of withdrawal by such participant of any amount
attributable to the benefit derived from contributions
made by such participant. The preceding sentence shall
not apply to the accrued benefit of any participant
unless, at the time of such withdrawal, such
participant has a nonforfeitable right to at least 50
percent of such accrued benefit (as determined under
section 411). The first sentence of this paragraph
shall not apply to the extent that an accrued benefit
is permitted to be forfeited in accordance with section
411(a)(3)(D)(iii) (relating to proportional forfeitures
of benefits accrued before September 2, 1974, in the
event of withdrawal of certain mandatory
contributions).
(20) A trust forming part of a pension plan shall not
be treated as failing to constitute a qualified trust
under this section merely because the pension plan of
which such trust is a part makes 1 or more
distributions within 1 taxable year to a distributee on
account of a termination of the plan of which the trust
is a part, or in the case of a profit-sharing or stock
bonus plan, a complete discontinuance of contributions
under such plan. This paragraph shall not apply to a
defined benefit plan unless the employer maintaining
such plan files a notice with the Pension Benefit
Guaranty Corporation (at the time and in the manner
prescribed by the Pension Benefit Guaranty Corporation)
notifying the Corporation of such payment or
distribution and the Corporation has approved such
payment or distribution or, within 90 days after the
date on which such notice was filed, has failed to
disapprove such payment or distribution. For purposes
of this paragraph, rules similar to the rules of
section 402(a)(6)(B) (as in effect before its repeal by
section 521 of the Unemployment Compensation Amendments
of 1992) shall apply.
(22) If a defined contribution plan (other than a
profit-sharing plan)--
(A) is established by an employer whose stock
is not readily tradable on an established
market, and
(B) after acquiring securities of the
employer, more than 10 percent of the total
assets of the plan are securities of the
employer,
any trust forming part of such plan shall not
constitute a qualified trust under this section unless
the plan meets the requirements of subsection (e) of
section 409. The requirements of subsection (e) of
section 409 shall not apply to any employees of an
employer who are participants in any defined
contribution plan established and maintained by such
employer if the stock of such employer is not readily
tradable on an established market and the trade or
business of such employer consists of publishing on a
regular basis a newspaper for general circulation. For
purposes of the preceding sentence, subsections (b),
(c), (m), and (o) of section 414 shall not apply except
for determining whether stock of the employer is not
readily tradable on an established market.
(23) A stock bonus plan shall not be treated as
meeting the requirements of this section unless such
plan meets the requirements of subsections (h) and (o)
of section 409, except that in applying section 409(h)
for purposes of this paragraph, the term ``employer
securities'' shall include any securities of the
employer held by the plan.
(24) Any group trust which otherwise meets the
requirements of this section shall not be treated as
not meeting such requirements on account of the
participation or inclusion in such trust of the moneys
of any plan or governmental unit described in section
818(a)(6).
(25) Requirement that actuarial assumptions be
specified.--A defined benefit plan shall not be treated
as providing definitely determinable benefits unless,
whenever the amount of any benefit is to be determined
on the basis of actuarial assumptions, such assumptions
are specified in the plan in a way which precludes
employer discretion.
(26) Additional participation requirements.--
(A) In general.--In the case of a trust which
is a part of a defined benefit plan, such trust
shall not constitute a qualified trust under
this subsection unless on each day of the plan
year such trust benefits at least the lesser
of--
(i) 50 employees of the employer, or
(ii) the greater of--
(I) 40 percent of all
employees of the employer, or
(II) 2 employees (or if there
is only 1 employee, such
employee).
(B) Treatment of excludable employees.--
(i) In general.--A plan may exclude
from consideration under this paragraph
employees described in paragraphs (3)
and (4)(A) of section 410(b).
(ii) Separate application for certain
excludable employees.--If employees
described in section 410(b)(4)(B) are
covered under a plan which meets the
requirements of subparagraph (A)
separately with respect to such
employees, such employees may be
excluded from consideration in
determining whether any plan of the
employer meets such requirements if--
(I) the benefits for such
employees are provided under
the same plan as benefits for
other employees,
(II) the benefits provided to
such employees are not greater
than comparable benefits
provided to other employees
under the plan, and
(III) no highly compensated
employee (within the meaning of
section 414(q)) is included in
the group of such employees for
more than 1 year.
(C) Special rule for collective bargaining
units.--Except to the extent provided in
regulations, a plan covering only employees
described in section 410(b)(3)(A) may exclude
from consideration any employees who are not
included in the unit or units in which the
covered employees are included.
(D) Paragraph not to apply to multiemployer
plans.--Except to the extent provided in
regulations, this paragraph shall not apply to
employees in a multiemployer plan (within the
meaning of section 414(f)) who are covered by
collective bargaining agreements.
(E) Special rule for certain dispositions or
acquisitions.--Rules similar to the rules of
section 410(b)(6)(C) shall apply for purposes
of this paragraph.
(F) Separate lines of business.--At the
election of the employer and with the consent
of the Secretary, this paragraph may be applied
separately with respect to each separate line
of business of the employer. For purposes of
this paragraph, the term ``separate line of
business'' has the meaning given such term by
section 414(r) (without regard to paragraph
(2)(A) or (7) thereof).
(G) Exception for governmental plans.--This
paragraph shall not apply to a governmental
plan (within the meaning of section 414(d)).
(H) Regulations.--The Secretary may by
regulation provide that any separate benefit
structure, any separate trust, or any other
separate arrangement is to be treated as a
separate plan for purposes of applying this
paragraph.
(27) Determinations as to profit-sharing plans.--
(A) Contributions need not be based on
profits.--The determination of whether the plan
under which any contributions are made is a
profit-sharing plan shall be made without
regard to current or accumulated profits of the
employer and without regard to whether the
employer is a tax-exempt organization.
(B) Plan must designate type.--In the case of
a plan which is intended to be a money purchase
pension plan or a profit-sharing plan, a trust
forming part of such plan shall not constitute
a qualified trust under this subsection unless
the plan designates such intent at such time
and in such manner as the Secretary may
prescribe.
(28) Additional requirements relating to employee
stock ownership plans.--
(A) In general.--In the case of a trust which
is part of an employee stock ownership plan
(within the meaning of section 4975(e)(7)) or a
plan which meets the requirements of section
409(a), such trust shall not constitute a
qualified trust under this section unless such
plan meets the requirements of subparagraphs
(B) and (C).
(B) Diversification of investments.--
(i) In general.--A plan meets the
requirements of this subparagraph if
each qualified participant in the plan
may elect within 90 days after the
close of each plan year in the
qualified election period to direct the
plan as to the investment of at least
25 percent of the participant's account
in the plan (to the extent such portion
exceeds the amount to which a prior
election under this subparagraph
applies). In the case of the election
year in which the participant can make
his last election, the preceding
sentence shall be applied by
substituting ``50 percent'' for ``25
percent''.
(ii) Method of meeting
requirements.--A plan shall be treated
as meeting the requirements of clause
(i) if--
(I) the portion of the
participant's account covered
by the election under clause
(i) is distributed within 90
days after the period during
which the election may be made,
or
(II) the plan offers at least
3 investment options (not
inconsistent with regulations
prescribed by the Secretary) to
each participant making an
election under clause (i) and
within 90 days after the period
during which the election may
be made, the plan invests the
portion of the participant's
account covered by the election
in accordance with such
election.
(iii) Qualified participant.--For
purposes of this subparagraph, the term
``qualified participant'' means any
employee who has completed at least 10
years of participation under the plan
and has attained age 55.
(iv) Qualified election period.--For
purposes of this subparagraph, the term
``qualified election period'' means the
6-plan-year period beginning with the
later of--
(I) the 1st plan year in
which the individual first
became a qualified participant,
or
(II) the 1st plan year
beginning after December 31,
1986.
For purposes of the preceding sentence, an
employer may elect to treat an individual first
becoming a qualified participant in the 1st
plan year beginning in 1987 as having become a
participant in the 1st plan year beginning in
1988.
(v) Exception.--This subparagraph
shall not apply to an applicable
defined contribution plan (as defined
in paragraph (35)(E)).
(C) Use of independent appraiser.--A plan
meets the requirements of this subparagraph if
all valuations of employer securities which are
not readily tradable on an established
securities market with respect to activities
carried on by the plan are by an independent
appraiser. For purposes of the preceding
sentence, the term ``independent appraiser''
means any appraiser meeting requirements
similar to the requirements of the regulations
prescribed under section 170(a)(1).
(29) Benefit limitations.--In the case of a defined
benefit plan (other than a multiemployer plan or a CSEC
plan) to which the requirements of section 412 apply,
the trust of which the plan is a part shall not
constitute a qualified trust under this subsection
unless the plan meets the requirements of section 436.
(30) Limitations on elective deferrals.--In the case
of a trust which is part of a plan under which elective
deferrals (within the meaning of section 402(g)(3)) may
be made with respect to any individual during a
calendar year, such trust shall not constitute a
qualified trust under this subsection unless the plan
provides that the amount of such deferrals under such
plan and all other plans, contracts, or arrangements of
an employer maintaining such plan may not exceed the
amount of the limitation in effect under section
402(g)(1)(A) for taxable years beginning in such
calendar year.
(31) Direct transfer of eligible rollover
distributions.--
(A) In general.--A trust shall not constitute
a qualified trust under this section unless the
plan of which such trust is a part provides
that if the distributee of any eligible
rollover distribution--
(i) elects to have such distribution
paid directly to an eligible retirement
plan, and
(ii) specifies the eligible
retirement plan to which such
distribution is to be paid (in such
form and at such time as the plan
administrator may prescribe),
such distribution shall be made in the form of
a direct trustee-to-trustee transfer to the
eligible retirement plan so specified.
(B) Certain mandatory distributions.--
(i) In general.--In case of a trust
which is part of an eligible plan, such
trust shall not constitute a qualified
trust under this section unless the
plan of which such trust is a part
provides that if--
(I) a distribution described
in clause (ii) in excess of
$1,000 is made, and
(II) the distributee does not
make an election under
subparagraph (A) and does not
elect to receive the
distribution directly,
the plan administrator shall make such
transfer to an individual retirement plan of a
designated trustee or issuer and shall notify
the distributee in writing (either separately
or as part of the notice under section 402(f))
that the distribution may be transferred to
another individual retirement plan.
(ii) Eligible plan.--For purposes of
clause (i), the term ``eligible plan''
means a plan which provides that any
nonforfeitable accrued benefit for
which the present value (as determined
under section 411(a)(11)) does not
exceed $5,000 shall be immediately
distributed to the participant.
(C) Limitation.--Subparagraphs (A) and (B)
shall apply only to the extent that the
eligible rollover distribution would be
includible in gross income if not transferred
as provided in subparagraph (A) (determined
without regard to sections 402(c), 403(a)(4),
403(b)(8), and 457(e)(16)). The preceding
sentence shall not apply to such distribution
if the plan to which such distribution is
transferred--
(i) is a qualified trust which is
part of a plan which is a defined
contribution plan and agrees to
separately account for amounts so
transferred, including separately
accounting for the portion of such
distribution which is includible in
gross income and the portion of such
distribution which is not so
includible, or
(ii) is an eligible retirement plan
described in clause (i) or (ii) of
section 402(c)(8)(B).
(D) Eligible rollover distribution.--For
purposes of this paragraph, the term ``eligible
rollover distribution'' has the meaning given
such term by section 402(f)(2)(A).
(E) Eligible retirement plan.--For purposes
of this paragraph, the term ``eligible
retirement plan'' has the meaning given such
term by section 402(c)(8)(B), except that a
qualified trust shall be considered an eligible
retirement plan only if it is a defined
contribution plan, the terms of which permit
the acceptance of rollover distributions.
(32) Treatment of failure to make certain payments if
plan has liquidity shortfall.--
(A) In general.--A trust forming part of a
pension plan to which section 430(j)(4) or
433(f)(5) applies shall not be treated as
failing to constitute a qualified trust under
this section merely because such plan ceases to
make any payment described in subparagraph (B)
during any period that such plan has a
liquidity shortfall (as defined in section
430(j)(4) or 433(f)(5)).
(B) Payments described.--A payment is
described in this subparagraph if such payment
is--
(i) any payment, in excess of the
monthly amount paid under a single life
annuity (plus any social security
supplements described in the last
sentence of section 411(a)(9)), to a
participant or beneficiary whose
annuity starting date (as defined in
section 417(f)(2)) occurs during the
period referred to in subparagraph (A),
(ii) any payment for the purchase of
an irrevocable commitment from an
insurer to pay benefits, and
(iii) any other payment specified by
the Secretary by regulations.
(C) Period of shortfall.--For purposes of
this paragraph, a plan has a liquidity
shortfall during the period that there is an
underpayment of an installment under section
430(j)(3) or 433(f) by reason of section
430(j)(4)(A) or 433(f)(5), respectively.
(33) Prohibition on benefit increases while sponsor
is in bankruptcy.--
(A) In general.--A trust which is part of a
plan to which this paragraph applies shall not
constitute a qualified trust under this section
if an amendment to such plan is adopted while
the employer is a debtor in a case under title
11, United States Code, or similar Federal or
State law, if such amendment increases
liabilities of the plan by reason of--
(i) any increase in benefits,
(ii) any change in the accrual of
benefits, or
(iii) any change in the rate at which
benefits become nonforfeitable under
the plan,
with respect to employees of the debtor, and
such amendment is effective prior to the
effective date of such employer's plan of
reorganization.
(B) Exceptions.--This paragraph shall not
apply to any plan amendment if--
(i) the plan, were such amendment to
take effect, would have a funding
target attainment percentage (as
defined in section 430(d)(2)) of 100
percent or more,
(ii) the Secretary determines that
such amendment is reasonable and
provides for only de minimis increases
in the liabilities of the plan with
respect to employees of the debtor,
(iii) such amendment only repeals an
amendment described in section
412(d)(2), or
(iv) such amendment is required as a
condition of qualification under this
part.
(C) Plans to which this paragraph applies.--
This paragraph shall apply only to plans (other
than multiemployer plans or CSEC plans) covered
under section 4021 of the Employee Retirement
Income Security Act of 1974.
(D) Employer.--For purposes of this
paragraph, the term ``employer'' means the
employer referred to in section 412(b)(1),
without regard to section 412(b)(2).
(34) Benefits of missing participants on plan
termination.--In the case of a plan covered by title IV
of the Employee Retirement Income Security Act of 1974,
a trust forming part of such plan shall not be treated
as failing to constitute a qualified trust under this
section merely because the pension plan of which such
trust is a part, upon its termination, transfers
benefits of missing participants to the Pension Benefit
Guaranty Corporation in accordance with section 4050 of
such Act.
(35) Diversification requirements for certain defined
contribution plans.--
(A) In general.--A trust which is part of an
applicable defined contribution plan shall not
be treated as a qualified trust unless the plan
meets the diversification requirements of
subparagraphs (B), (C), and (D).
(B) Employee contributions and elective
deferrals invested in employer securities.--In
the case of the portion of an applicable
individual's account attributable to employee
contributions and elective deferrals which is
invested in employer securities, a plan meets
the requirements of this subparagraph if the
applicable individual may elect to direct the
plan to divest any such securities and to
reinvest an equivalent amount in other
investment options meeting the requirements of
subparagraph (D).
(C) Employer contributions invested in
employer securities.--In the case of the
portion of the account attributable to employer
contributions other than elective deferrals
which is invested in employer securities, a
plan meets the requirements of this
subparagraph if each applicable individual
who--
(i) is a participant who has
completed at least 3 years of service,
or
(ii) is a beneficiary of a
participant described in clause (i) or
of a deceased participant,
may elect to direct the plan to divest any such
securities and to reinvest an equivalent amount
in other investment options meeting the
requirements of subparagraph (D).
(D) Investment options.--
(i) In general.--The requirements of
this subparagraph are met if the plan
offers not less than 3 investment
options, other than employer
securities, to which an applicable
individual may direct the proceeds from
the divestment of employer securities
pursuant to this paragraph, each of
which is diversified and has materially
different risk and return
characteristics.
(ii) Treatment of certain
restrictions and conditions.--
(I) Time for making
investment choices.--A plan
shall not be treated as failing
to meet the requirements of
this subparagraph merely
because the plan limits the
time for divestment and
reinvestment to periodic,
reasonable opportunities
occurring no less frequently
than quarterly.
(II) Certain restrictions and
conditions not allowed.--Except
as provided in regulations, a
plan shall not meet the
requirements of this
subparagraph if the plan
imposes restrictions or
conditions with respect to the
investment of employer
securities which are not
imposed on the investment of
other assets of the plan. This
subclause shall not apply to
any restrictions or conditions
imposed by reason of the
application of securities laws.
(E) Applicable defined contribution plan.--
For purposes of this paragraph--
(i) In general.--The term
``applicable defined contribution
plan'' means any defined contribution
plan which holds any publicly traded
employer securities.
(ii) Exception for certain esops.--
Such term does not include an employee
stock ownership plan if--
(I) there are no
contributions to such plan (or
earnings thereunder) which are
held within such plan and are
subject to subsection (k) or
(m), and
(II) such plan is a separate
plan for purposes of section
414(l) with respect to any
other defined benefit plan or
defined contribution plan
maintained by the same employer
or employers.
(iii) Exception for one participant
plans.--Such term does not include a
one-participant retirement plan.
(iv) One-participant retirement
plan.--For purposes of clause (iii),
the term ``one-participant retirement
plan'' means a retirement plan that on
the first day of the plan year--
(I) covered only one
individual (or the individual
and the individual's spouse)
and the individual (or the
individual and the individual's
spouse) owned 100 percent of
the plan sponsor (whether or
not incorporated), or
(II) covered only one or more
partners (or partners and their
spouses) in the plan sponsor.
(F) Certain plans treated as holding publicly
traded employer securities.--
(i) In general.--Except as provided
in regulations or in clause (ii), a
plan holding employer securities which
are not publicly traded employer
securities shall be treated as holding
publicly traded employer securities if
any employer corporation, or any member
of a controlled group of corporations
which includes such employer
corporation, has issued a class of
stock which is a publicly traded
employer security.
(ii) Exception for certain controlled
groups with publicly traded
securities.--Clause (i) shall not apply
to a plan if--
(I) no employer corporation,
or parent corporation of an
employer corporation, has
issued any publicly traded
employer security, and
(II) no employer corporation,
or parent corporation of an
employer corporation, has
issued any special class of
stock which grants particular
rights to, or bears particular
risks for, the holder or issuer
with respect to any corporation
described in clause (i) which
has issued any publicly traded
employer security.
(iii) Definitions.--For purposes of
this subparagraph, the term--
(I) ``controlled group of
corporations'' has the meaning
given such term by section
1563(a), except that ``50
percent'' shall be substituted
for ``80 percent'' each place
it appears,
(II) ``employer corporation''
means a corporation which is an
employer maintaining the plan,
and
(III) ``parent corporation''
has the meaning given such term
by section 424(e).
(G) Other definitions.--For purposes of this
paragraph--
(i) Applicable individual.--The term
``applicable individual'' means--
(I) any participant in the
plan, and
(II) any beneficiary who has
an account under the plan with
respect to which the
beneficiary is entitled to
exercise the rights of a
participant.
(ii) Elective deferral.--The term
``elective deferral'' means an employer
contribution described in section
402(g)(3)(A).
(iii) Employer security.--The term
``employer security'' has the meaning
given such term by section 407(d)(1) of
the Employee Retirement Income Security
Act of 1974.
(iv) Employee stock ownership plan.--
The term ``employee stock ownership
plan'' has the meaning given such term
by section 4975(e)(7).
(v) Publicly traded employer
securities.--The term ``publicly traded
employer securities'' means employer
securities which are readily tradable
on an established securities market.
(vi) Year of service.--The term
``year of service'' has the meaning
given such term by section 411(a)(5).
(H) Transition rule for securities
attributable to employer contributions.--
(i) Rules phased in over 3 years.--
(I) In general.--In the case
of the portion of an account to
which subparagraph (C) applies
and which consists of employer
securities acquired in a plan
year beginning before January
1, 2007, subparagraph (C) shall
only apply to the applicable
percentage of such securities.
This subparagraph shall be
applied separately with respect
to each class of securities.
(II) Exception for certain
participants aged 55 or over.--
Subclause (I) shall not apply
to an applicable individual who
is a participant who has
attained age 55 and completed
at least 3 years of service
before the first plan year
beginning after December 31,
2005.
(ii) Applicable percentage.--For
purposes of clause (i), the applicable
percentage shall be determined as
follows:
(36) Distributions during working retirement.--A
trust forming part of a pension plan shall not be
treated as failing to constitute a qualified trust
under this section solely because the plan provides
that a distribution may be made from such trust to an
employee who has attained age 62 and who is not
separated from employment at the time of such
distribution.
(37) Death benefits under userra-qualified active
military service.--A trust shall not constitute a
qualified trust unless the plan provides that, in the
case of a participant who dies while performing
qualified military service (as defined in section
414(u)), the survivors of the participant are entitled
to any additional benefits (other than benefit accruals
relating to the period of qualified military service)
provided under the plan had the participant resumed and
then terminated employment on account of death.
Paragraphs (11), (12), (13), (14), (15), (19), and (20) shall
apply only in the case of a plan to which section 411 (relating
to minimum vesting standards) applies without regard to
subsection (e)(2) of such section.
(b) Certain retroactive changes in plan.--A stock bonus,
pension, profit-sharing, or annuity plan shall be considered as
satisfying the requirements of subsection (a) for the period
beginning with the date on which it was put into effect, or for
the period beginning with the earlier of the date on which
there was adopted or put into effect any amendment which caused
the plan to fail to satisfy such requirements, and ending with
the time prescribed by law for filing the return of the
employer for his taxable year in which such plan or amendment
was adopted (including extensions thereof) or such later time
as the Secretary may designate, if all provisions of the plan
which are necessary to satisfy such requirements are in effect
by the end of such period and have been made effective for all
purposes for the whole of such period.
(c) Definitions and rules relating to self-employed
individuals and owner-employees.--For purposes of this
section--
(1) Self-employed individual treated as employee.--
(A) In general.--The term ``employee''
includes, for any taxable year, an individual
who is a self-employed individual for such
taxable year.
(B) Self-employed individual.--The term
``self-employed individual'' means, with
respect to any taxable year, an individual who
has earned income (as defined in paragraph (2))
for such taxable year. To the extent provided
in regulations prescribed by the Secretary,
such term also includes, for any taxable year--
(i) an individual who would be a
self-employed individual within the
meaning of the preceding sentence but
for the fact that the trade or business
carried on by such individual did not
have net profits for the taxable year,
and
(ii) an individual who has been a
self-employed individual within the
meaning of the preceding sentence for
any prior taxable year.
(2) Earned income.--
(A) In general.--The term ``earned income''
means the net earnings from self-employment (as
defined in section 1402(a)), but such net
earnings shall be determined--
(i) only with respect to a trade or
business in which personal services of
the taxpayer are a material income-
producing factor,
(ii) without regard to paragraphs (4)
and (5) of section 1402(c),
(iii) in the case of any individual
who is treated as an employee under
subparagraph (A), (C), or (D) of
section 3121(d)(3), without regard to
section 1402(c)(2),
(iv) without regard to items which
are not included in gross income for
purposes of this chapter, and the
deductions properly allocable to or
chargeable against such items,
(v) with regard to the deductions
allowed by section 404 to the taxpayer,
and
(vi) with regard to the deduction
allowed to the taxpayer by section
164(f).
For purposes of this subparagraph, section
1402, as in effect for a taxable year ending on
December 31, 1962, shall be treated as having
been in effect for all taxable years ending
before such date. For purposes of this part
only (other than sections 419 and 419A), this
subparagraph shall be applied as if the term
``trade or business'' for purposes of section
1402 included service described in section
1402(c)(6).
(C) Income from disposition of certain
property.--For purposes of this section, the
term ``earned income'' includes gains (other
than any gain which is treated under any
provision of this chapter as gain from the sale
or exchange of a capital asset) and net
earnings derived from the sale or other
disposition of, the transfer of any interest
in, or the licensing of the use of property
(other than good will) by an individual whose
personal efforts created such property.
(3) Owner-employee.--The term ``owner-employee''
means an employee who--
(A) owns the entire interest in an
unincorporated trade or business, or
(B) in the case of a partnership, is a
partner who owns more than 10 percent of either
the capital interest or the profits interest in
such partnership.
To the extent provided in regulations prescribed by the
Secretary, such term also means an individual who has
been an owner-employee within the meaning of the
preceding sentence.
(4) Employer.--An individual who owns the entire
interest in an unincorporated trade or business shall
be treated as his own employer. A partnership shall be
treated as the employer of each partner who is an
employee within the meaning of paragraph (1).
(5) Contributions on behalf of owner-employees.--The
term ``contribution on behalf of an owner-employee''
includes, except as the context otherwise requires, a
contribution under a plan--
(A) by the employer for an owner-employee,
and
(B) by an owner-employee as an employee.
(6) Special rule for certain fishermen.--For purposes
of this subsection, the term ``self-employed
individual'' includes an individual described in
section 3121(b)(20) (relating to certain fishermen).
(d) Contribution limit on owner-employees.--A trust forming
part of a pension or profit-sharing plan which provides
contributions or benefits for employees some or all of whom are
owner-employees shall constitute a qualified trust under this
section only if, in addition to meeting the requirements of
subsection (a), the plan provides that contributions on behalf
of any owner-employee may be made only with respect to the
earned income of such owner-employee which is derived from the
trade or business with respect to which such plan is
established.
(f) Certain custodial accounts and contracts.--For purposes
of this title, a custodial account, an annuity contract, or a
contract (other than a life, health or accident, property,
casualty, or liability insurance contract) issued by an
insurance company qualified to do business in a State shall be
treated as a qualified trust under this section if--
(1) the custodial account or contract would, except
for the fact that it is not a trust, constitute a
qualified trust under this section, and
(2) in the case of a custodial account the assets
thereof are held by a bank (as defined in section
408(n)) or another person who demonstrates, to the
satisfaction of the Secretary, that the manner in which
he will hold the assets will be consistent with the
requirements of this section.
For purposes of this title, in the case of a custodial account
or contract treated as a qualified trust under this section by
reason of this subsection, the person holding the assets of
such account or holding such contract shall be treated as the
trustee thereof.
(g) Annuity defined.--For purposes of this section and
sections 402, 403, and 404, the term ``annuity'' includes a
face-amount certificate, as defined in section 2(a)(15) of the
Investment Company Act of 1940 (15 U.S.C., sec. 80a-2); but
does not include any contract or certificate issued after
December 31, 1962, which is transferable, if any person other
than the trustee of a trust described in section 401(a) which
is exempt from tax under section 501(a) is the owner of such
contract or certificate.
(h) Medical, etc., benefits for retired employees and their
spouses and dependents.--Under regulations prescribed by the
Secretary, and subject to the provisions of section 420, a
pension or annuity plan may provide for the payment of benefits
for sickness, accident, hospitalization, and medical expenses
of retired employees, their spouses and their dependents, but
only if--
(1) such benefits are subordinate to the retirement
benefits provided by the plan,
(2) a separate account is established and maintained
for such benefits,
(3) the employer's contributions to such separate
account are reasonable and ascertainable,
(4) it is impossible, at any time prior to the
satisfaction of all liabilities under the plan to
provide such benefits, for any part of the corpus or
income of such separate account to be (within the
taxable year or thereafter) used for, or diverted to,
any purpose other than the providing of such benefits,
(5) notwithstanding the provisions of subsection
(a)(2), upon the satisfaction of all liabilities under
the plan to provide such benefits, any amount remaining
in such separate account must, under the terms of the
plan, be returned to the employer, and
(6) in the case of an employee who is a key employee,
a separate account is established and maintained for
such benefits payable to such employee (and [his
spouse] the employee's spouse and dependents) and such
benefits (to the extent attributable to plan years
beginning after March 31, 1984, for which the employee
is a key employee) are only payable to such employee
(and [his spouse] the employee's spouse and dependents)
from such separate account.
For purposes of paragraph (6), the term ``key employee'' means
any employee, who at any time during the plan year or any
preceding plan year during which contributions were made on
behalf of such employee, is or was a key employee as defined in
section 416(i). In no event shall the requirements of paragraph
(1) be treated as met if the aggregate actual contributions for
medical benefits, when added to actual contributions for life
insurance protection under the plan, exceed 25 percent of the
total actual contributions to the plan (other than
contributions to fund past service credits) after the date on
which the account is established. For purposes of this
subsection, the term ``dependent'' shall include any individual
who is a child (as defined in section 152(f)(1)) of a retired
employee who as of the end of the calendar year has not
attained age 27.
(i) Certain union-negotiated pension plans.--In the case of a
trust forming part of a pension plan which has been determined
by the Secretary to constitute a qualified trust under
subsection (a) and to be exempt from taxation under section
501(a) for a period beginning after contributions were first
made to or for such trust, if it is shown to the satisfaction
of the Secretary that--
(1) such trust was created pursuant to a collective
bargaining agreement between employee representatives
and one or more employers,
(2) any disbursements of contributions, made to or
for such trust before the time as of which the
Secretary determined that the trust constituted a
qualified trust, substantially complied with the terms
of the trust, and the plan of which the trust is a
part, as subsequently qualified, and
(3) before the time as of which the Secretary
determined that the trust constitutes a qualified
trust, the contributions to or for such trust were not
used in a manner which would jeopardize the interests
of its beneficiaries,
then such trust shall be considered as having constituted a
qualified trust under subsection (a) and as having been exempt
from taxation under section 501(a) for the period beginning on
the date on which contributions were first made to or for such
trust and ending on the date such trust first constituted
(without regard to this subsection) a qualified trust under
subsection (a).
(k) Cash or deferred arrangements.--
(1) General rule.--A profit-sharing or stock bonus
plan, a pre-ERISA money purchase plan, or a rural
cooperative plan shall not be considered as not
satisfying the requirements of subsection (a) merely
because the plan includes a qualified cash or deferred
arrangement.
(2) Qualified cash or deferred arrangement.--A
qualified cash or deferred arrangement is any
arrangement which is part of a profit-sharing or stock
bonus plan, a pre-ERISA money purchase plan, or a rural
cooperative plan which meets the requirements of
subsection (a)--
(A) under which a covered employee may elect
to have the employer make payments as
contributions to a trust under the plan on
behalf of the employee, or to the employee
directly in cash;
(B) under which amounts held by the trust
which are attributable to employer
contributions made pursuant to the employee's
election--
(i) may not be distributable to
participants or other beneficiaries
earlier than--
(I) severance from
employment, death, or
disability,
(II) an event described in
paragraph (10),
(III) in the case of a
profit-sharing or stock bonus
plan, the attainment of age
591/2,
(IV) subject to the
provisions of paragraph (14),
upon hardship of the employee,
or
(V) in the case of a
qualified reservist
distribution (as defined in
section 72(t)(2)(G)(iii)), the
date on which a period referred
to in subclause (III) of such
section begins, and
(ii) will not be distributable merely
by reason of the completion of a stated
period of participation or the lapse of
a fixed number of years;
(C) which provides that an employee's right
to his accrued benefit derived from employer
contributions made to the trust pursuant to his
election is nonforfeitable, and
(D) which does not require, as a condition of
participation in the arrangement, that an
employee complete a period of service with the
employer (or employers) maintaining the plan
extending beyond the period permitted under
section 410(a)(1) (determined without regard to
subparagraph (B)(i) thereof).
(3) Application of participation and discrimination
standards.--
(A) A cash or deferred arrangement shall not
be treated as a qualified cash or deferred
arrangement unless--
(i) those employees eligible to
benefit under the arrangement satisfy
the provisions of section 410(b)(1),
and
(ii) the actual deferral percentage
for eligible highly compensated
employees (as defined in paragraph (5))
for the plan year bears a relationship
to the actual deferral percentage for
all other eligible employees for the
preceding plan year which meets either
of the following tests:
(I) The actual deferral
percentage for the group of
eligible highly compensated
employees is not more than the
actual deferral percentage of
all other eligible employees
multiplied by 1.25.
(II) The excess of the actual
deferral percentage for the
group of eligible highly
compensated employees over that
of all other eligible employees
is not more than 2 percentage
points, and the actual deferral
percentage for the group of
eligible highly compensated
employees is not more than the
actual deferral percentage of
all other eligible employees
multiplied by 2.
If 2 or more plans which include cash or
deferred arrangements are considered as 1 plan
for purposes of section 401(a)(4) or 410(b),
the cash or deferred arrangements included in
such plans shall be treated as 1 arrangement
for purposes of this subparagraph.
If any highly compensated employee is a
participant under 2 or more cash or deferred
arrangements of the employer, for purposes of
determining the deferral percentage with
respect to such employee, all such cash or
deferred arrangements shall be treated as 1
cash or deferred arrangement. An arrangement
may apply clause (ii) by using the plan year
rather than the preceding plan year if the
employer so elects, except that if such an
election is made, it may not be changed except
as provided by the Secretary.
(B) For purposes of subparagraph (A), the
actual deferral percentage for a specified
group of employees for a plan year shall be the
average of the ratios (calculated separately
for each employee in such group) of--
(i) the amount of employer
contributions actually paid over to the
trust on behalf of each such employee
for such plan year, to
(ii) the employee's compensation for
such plan year.
(C) A cash or deferred arrangement shall be
treated as meeting the requirements of
subsection (a)(4) with respect to contributions
if the requirements of subparagraph (A)(ii) are
met.
(D) For purposes of subparagraph (B), the
employer contributions on behalf of any
employee--
(i) shall include any employer
contributions made pursuant to the
employee's election under paragraph
(2), and
(ii) under such rules as the
Secretary may prescribe, may, at the
election of the employer, include--
(I) matching contributions
(as defined in 401(m)(4)(A))
which meet the requirements of
paragraph (2)(B) and (C), and
(II) qualified nonelective
contributions (within the
meaning of section
401(m)(4)(C)).
(E) For purposes of this paragraph, in the
case of the first plan year of any plan (other
than a successor plan), the amount taken into
account as the actual deferral percentage of
nonhighly compensated employees for the
preceding plan year shall be--
(i) 3 percent, or
(ii) if the employer makes an
election under this subclause, the
actual deferral percentage of nonhighly
compensated employees determined for
such first plan year.
(F) Special rule for early participation.--If
an employer elects to apply section
410(b)(4)(B) in determining whether a cash or
deferred arrangement meets the requirements of
subparagraph (A)(i), the employer may, in
determining whether the arrangement meets the
requirements of subparagraph (A)(ii), exclude
from consideration all eligible employees
(other than highly compensated employees) who
have not met the minimum age and service
requirements of section 410(a)(1)(A).
(G) Governmental plan.--A governmental plan
(within the meaning of section 414(d)) shall be
treated as meeting the requirements of this
paragraph.
(4) Other requirements.--
(A) Benefits (other than matching
contributions) must not be contingent on
election to defer.--A cash or deferred
arrangement of any employer shall not be
treated as a qualified cash or deferred
arrangement if any other benefit is conditioned
(directly or indirectly) on the employee
electing to have the employer make or not make
contributions under the arrangement in lieu of
receiving cash. The preceding sentence shall
not apply to any matching contribution (as
defined in section 401(m)) made by reason of
such an election.
(B) Eligibility of State and local
governments and tax-exempt organizations.--
(i) Tax-exempts eligible.--Except as
provided in clause (ii), any
organization exempt from tax under this
subtitle may include a qualified cash
or deferred arrangement as part of a
plan maintained by it.
(ii) Governments ineligible.--A cash
or deferred arrangement shall not be
treated as a qualified cash or deferred
arrangement if it is part of a plan
maintained by a State or local
government or political subdivision
thereof, or any agency or
instrumentality thereof. This clause
shall not apply to a rural cooperative
plan or to a plan of an employer
described in clause (iii).
(iii) Treatment of Indian tribal
governments.--An employer which is an
Indian tribal government (as defined in
section 7701(a)(40)), a subdivision of
an Indian tribal government (determined
in accordance with section 7871(d)), an
agency or instrumentality of an Indian
tribal government or subdivision
thereof, or a corporation chartered
under Federal, State, or tribal law
which is owned in whole or in part by
any of the foregoing may include a
qualified cash or deferred arrangement
as part of a plan maintained by the
employer.
(C) Coordination with other plans.--Except as
provided in section 401(m), any employer
contribution made pursuant to an employee's
election under a qualified cash or deferred
arrangement shall not be taken into account for
purposes of determining whether any other plan
meets the requirements of section 401(a) or
410(b). This subparagraph shall not apply for
purposes of determining whether a plan meets
the average benefit requirement of section
410(b)(2)(A)(ii).
(5) Highly compensated employee.--For purposes of
this subsection, the term ``highly compensated
employee'' has the meaning given such term by section
414(q).
(6) Pre-ERISA money purchase plan.--For purposes of
this subsection, the term ``pre-ERISA money purchase
plan'' means a pension plan--
(A) which is a defined contribution plan (as
defined in section 414(i)),
(B) which was in existence on June 27, 1974,
and which, on such date, included a salary
reduction arrangement, and
(C) under which neither the employee
contributions nor the employer contributions
may exceed the levels provided for by the
contribution formula in effect under the plan
on such date.
(7) Rural cooperative plan.--For purposes of this
subsection--
(A) In general.--The term ``rural cooperative
plan'' means any pension plan--
(i) which is a defined contribution
plan (as defined in section 414(i)),
and
(ii) which is established and
maintained by a rural cooperative.
(B) Rural cooperative defined.--For purposes
of subparagraph (A), the term ``rural
cooperative'' means--
(i) any organization which--
(I) is engaged primarily in
providing electric service on a
mutual or cooperative basis, or
(II) is engaged primarily in
providing electric service to
the public in its area of
service and which is exempt
from tax under this subtitle or
which is a State or local
government (or an agency or
instrumentality thereof), other
than a municipality (or an
agency or instrumentality
thereof),
(ii) any organization described in
paragraph (4) or (6) of section 501(c)
and at least 80 percent of the members
of which are organizations described in
clause (i),
(iii) a cooperative telephone company
described in section 501(c)(12),
(iv) any organization which--
(I) is a mutual irrigation or
ditch company described in
section 501(c)(12) (without
regard to the 85 percent
requirement thereof), or
(II) is a district organized
under the laws of a State as a
municipal corporation for the
purpose of irrigation, water
conservation, or drainage, and
(v) an organization which is a
national association of organizations
described in clause (i), (ii),, (iii),
or (iv).
(C) Special rule for certain distributions.--
A rural cooperative plan which includes a
qualified cash or deferred arrangement shall
not be treated as violating the requirements of
section 401(a) or of paragraph (2) merely by
reason of a hardship distribution or a
distribution to a participant after attainment
of age 591/2. For purposes of this section, the
term ``hardship distribution'' means a
distribution described in paragraph
(2)(B)(i)(IV) (without regard to the limitation
of its application to profit-sharing or stock
bonus plans).
(8) Arrangement not disqualified if excess
contributions distributed.--
(A) In general.--A cash or deferred
arrangement shall not be treated as failing to
meet the requirements of clause (ii) of
paragraph (3)(A) for any plan year if, before
the close of the following plan year--
(i) the amount of the excess
contributions for such plan year (and
any income allocable to such
contributions through the end of such
year) is distributed, or
(ii) to the extent provided in
regulations, the employee elects to
treat the amount of the excess
contributions as an amount distributed
to the employee and then contributed by
the employee to the plan.
Any distribution of excess contributions (and
income) may be made without regard to any other
provision of law.
(B) Excess contributions.--For purposes of
subparagraph (A), the term ``excess
contributions'' means, with respect to any plan
year, the excess of--
(i) the aggregate amount of employer
contributions actually paid over to the
trust on behalf of highly compensated
employees for such plan year, over
(ii) the maximum amount of such
contributions permitted under the
limitations of clause (ii) of paragraph
(3)(A) (determined by reducing
contributions made on behalf of highly
compensated employees in order of the
actual deferral percentages beginning
with the highest of such percentages).
(C) Method of distributing excess
contributions.--Any distribution of the excess
contributions for any plan year shall be made
to highly compensated employees on the basis of
the amount of contributions by, or on behalf
of, each of such employees.
(D) Additional tax under section 72(t) not to
apply.--No tax shall be imposed under section
72(t) on any amount required to be distributed
under this paragraph.
(E) Treatment of matching contributions
forfeited by reason of excess deferral or
contribution or permissible withdrawal.--For
purposes of paragraph (2)(C), a matching
contribution (within the meaning of subsection
(m)) shall not be treated as forfeitable merely
because such contribution is forfeitable if the
contribution to which the matching contribution
relates is treated as an excess contribution
under subparagraph (B), an excess deferral
under section 402(g)(2)(A), a permissible
withdrawal under section 414(w), or an excess
aggregate contribution under section
401(m)(6)(B).
(F) Cross reference.--For excise tax on
certain excess contributions, see section 4979.
(9) Compensation.--For purposes of this subsection,
the term ``compensation'' has the meaning given such
term by section 414(s).
(10) Distributions upon termination of plan.--
(A) In general.--An event described in this
subparagraph is the termination of the plan
without establishment or maintenance of another
defined contribution plan (other than an
employee stock ownership plan as defined in
section 4975(e)(7)).
(B) Distributions must be lump sum
distributions.--
(i) In general.--A termination shall
not be treated as described in
subparagraph (A) with respect to any
employee unless the employee receives a
lump sum distribution by reason of the
termination.
(ii) Lump-sum distribution.--For
purposes of this subparagraph, the term
``lump-sum distribution'' has the
meaning given such term by section
402(e)(4)(D) (without regard to
subclauses (I), (II), (III), and (IV)
of clause (i) thereof). Such term
includes a distribution of an annuity
contract from--
(I) a trust which forms a
part of a plan described in
section 401(a) and which is
exempt from tax under section
501(a), or
(II) an annuity plan
described in section 403(a).
(11) Adoption of simple plan to meet
nondiscrimination tests.--
(A) In general.--A cash or deferred
arrangement maintained by an eligible employer
shall be treated as meeting the requirements of
paragraph (3)(A)(ii) if such arrangement
meets--
(i) the contribution requirements of
subparagraph (B),
(ii) the exclusive plan requirements
of subparagraph (C), and
(iii) the vesting requirements of
section 408(p)(3).
(B) Contribution requirements.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement--
(I) an employee may elect to
have the employer make elective
contributions for the year on
behalf of the employee to a
trust under the plan in an
amount which is expressed as a
percentage of compensation of
the employee but which in no
event exceeds the amount in
effect under section
408(p)(2)(A)(ii),
(II) the employer is required
to make a matching contribution
to the trust for the year in an
amount equal to so much of the
amount the employee elects
under subclause (I) as does not
exceed 3 percent of
compensation for the year, and
(III) no other contributions
may be made other than
contributions described in
subclause (I) or (II).
(ii) Employer may elect 2-percent
nonelective contribution.--An employer
shall be treated as meeting the
requirements of clause (i)(II) for any
year if, in lieu of the contributions
described in such clause, the employer
elects (pursuant to the terms of the
arrangement) to make nonelective
contributions of 2 percent of
compensation for each employee who is
eligible to participate in the
arrangement and who has at least $5,000
of compensation from the employer for
the year. If an employer makes an
election under this subparagraph for
any year, the employer shall notify
employees of such election within a
reasonable period of time before the
60th day before the beginning of such
year.
(iii) Administrative requirements.--
(I) In general.--Rules
similar to the rules of
subparagraphs (B) and (C) of
section 408(p)(5) shall apply
for purposes of this
subparagraph.
(II) Notice of election
period.--The requirements of
this subparagraph shall not be
treated as met with respect to
any year unless the employer
notifies each employee eligible
to participate, within a
reasonable period of time
before the 60th day before the
beginning of such year (and,
for the first year the employee
is so eligible, the 60th day
before the first day such
employee is so eligible), of
the rules similar to the rules
of section 408(p)(5)(C) which
apply by reason of subclause
(I).
(C) Exclusive plan requirement.--The
requirements of this subparagraph are met for
any year to which this paragraph applies if no
contributions were made, or benefits were
accrued, for services during such year under
any qualified plan of the employer on behalf of
any employee eligible to participate in the
cash or deferred arrangement, other than
contributions described in subparagraph (B).
(D) Definitions and special rule.--
(i) Definitions.--For purposes of
this paragraph, any term used in this
paragraph which is also used in section
408(p) shall have the meaning given
such term by such section.
(ii) Coordination with top-heavy
rules.--A plan meeting the requirements
of this paragraph for any year shall
not be treated as a top-heavy plan
under section 416 for such year if such
plan allows only contributions required
under this paragraph.
(12) Alternative methods of meeting nondiscrimination
requirements.--
(A) In general.--A cash or deferred
arrangement shall be treated as meeting the
requirements of paragraph (3)(A)(ii) if such
arrangement--
(i) meets the contribution
requirements of subparagraph (B) or
(C), and
(ii) meets the notice requirements of
subparagraph (D).
(B) Matching contributions.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement, the employer makes
matching contributions on behalf of
each employee who is not a highly
compensated employee in an amount equal
to--
(I) 100 percent of the
elective contributions of the
employee to the extent such
elective contributions do not
exceed 3 percent of the
employee's compensation, and
(II) 50 percent of the
elective contributions of the
employee to the extent that
such elective contributions
exceed 3 percent but do not
exceed 5 percent of the
employee's compensation.
(ii) Rate for highly compensated
employees.--The requirements of this
subparagraph are not met if, under the
arrangement, the rate of matching
contribution with respect to any
elective contribution of a highly
compensated employee at any rate of
elective contribution is greater than
that with respect to an employee who is
not a highly compensated employee.
(iii) Alternative plan designs.--If
the rate of any matching contribution
with respect to any rate of elective
contribution is not equal to the
percentage required under clause (i),
an arrangement shall not be treated as
failing to meet the requirements of
clause (i) if--
(I) the rate of an employer's
matching contribution does not
increase as an employee's rate
of elective contributions
increase, and
(II) the aggregate amount of
matching contributions at such
rate of elective contribution
is at least equal to the
aggregate amount of matching
contributions which would be
made if matching contributions
were made on the basis of the
percentages described in clause
(i).
(C) Nonelective contributions.--The
requirements of this subparagraph are met if,
under the arrangement, the employer is
required, without regard to whether the
employee makes an elective contribution or
employee contribution, to make a contribution
to a defined contribution plan on behalf of
each employee who is not a highly compensated
employee and who is eligible to participate in
the arrangement in an amount equal to at least
3 percent of the employee's compensation.
(D) Notice requirement.--An arrangement meets
the requirements of this paragraph if, under
the arrangement, each employee eligible to
participate is, within a reasonable period
before any year, given written notice of the
employee's rights and obligations under the
arrangement which--
(i) is sufficiently accurate and
comprehensive to apprise the employee
of such rights and obligations, and
(ii) is written in a manner
calculated to be understood by the
average employee eligible to
participate.
(E) Other requirements.--
(i) Withdrawal and vesting
restrictions.--An arrangement shall not
be treated as meeting the requirements
of subparagraph (B) or (C) of this
paragraph unless the requirements of
subparagraphs (B) and (C) of paragraph
(2) are met with respect to all
employer contributions (including
matching contributions) taken into
account in determining whether the
requirements of subparagraphs (B) and
(C) of this paragraph are met.
(ii) Social security and similar
contributions not taken into account.--
An arrangement shall not be treated as
meeting the requirements of
subparagraph (B) or (C) unless such
requirements are met without regard to
subsection (l), and, for purposes of
subsection (l), employer contributions
under subparagraph (B) or (C) shall not
be taken into account.
(F) Other plans.--An arrangement shall be
treated as meeting the requirements under
subparagraph (A)(i) if any other plan
maintained by the employer meets such
requirements with respect to employees eligible
under the arrangement.
(13) Alternative method for automatic contribution
arrangements to meet nondiscrimination requirements.--
(A) In general.--A qualified automatic
contribution arrangement shall be treated as
meeting the requirements of paragraph
(3)(A)(ii).
(B) Qualified automatic contribution
arrangement.--For purposes of this paragraph,
the term ``qualified automatic contribution
arrangement'' means any cash or deferred
arrangement which meets the requirements of
subparagraphs (C) through (E).
(C) Automatic deferral.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement, each employee eligible to
participate in the arrangement is
treated as having elected to have the
employer make elective contributions in
an amount equal to a qualified
percentage of compensation.
(ii) Election out.--The election
treated as having been made under
clause (i) shall cease to apply with
respect to any employee if such
employee makes an affirmative
election--
(I) to not have such
contributions made, or
(II) to make elective
contributions at a level
specified in such affirmative
election.
(iii) Qualified percentage.--For
purposes of this subparagraph, the term
``qualified percentage'' means, with
respect to any employee, any percentage
determined under the arrangement if
such percentage is applied uniformly,
does not exceed 10 percent, and is at
least--
(I) 3 percent during the
period ending on the last day
of the first plan year which
begins after the date on which
the first elective contribution
described in clause (i) is made
with respect to such employee,
(II) 4 percent during the
first plan year following the
plan year described in
subclause (I),
(III) 5 percent during the
second plan year following the
plan year described in
subclause (I), and
(IV) 6 percent during any
subsequent plan year.
(iv) Automatic deferral for current
employees not required.--Clause (i) may
be applied without taking into account
any employee who--
(I) was eligible to
participate in the arrangement
(or a predecessor arrangement)
immediately before the date on
which such arrangement becomes
a qualified automatic
contribution arrangement
(determined after application
of this clause), and
(II) had an election in
effect on such date either to
participate in the arrangement
or to not participate in the
arrangement.
(D) Matching or nonelective contributions.--
(i) In general.--The requirements of
this subparagraph are met if, under the
arrangement, the employer--
(I) makes matching
contributions on behalf of each
employee who is not a highly
compensated employee in an
amount equal to the sum of 100
percent of the elective
contributions of the employee
to the extent that such
contributions do not exceed 1
percent of compensation plus 50
percent of so much of such
contributions as exceed 1
percent but do not exceed 6
percent of compensation, or
(II) is required, without
regard to whether the employee
makes an elective contribution
or employee contribution, to
make a contribution to a
defined contribution plan on
behalf of each employee who is
not a highly compensated
employee and who is eligible to
participate in the arrangement
in an amount equal to at least
3 percent of the employee's
compensation.
(ii) Application of rules for
matching contributions.--The rules of
clauses (ii) and (iii) of paragraph
(12)(B) shall apply for purposes of
clause (i)(I).
(iii) Withdrawal and vesting
restrictions.--An arrangement shall not
be treated as meeting the requirements
of clause (i) unless, with respect to
employer contributions (including
matching contributions) taken into
account in determining whether the
requirements of clause (i) are met--
(I) any employee who has
completed at least 2 years of
service (within the meaning of
section 411(a)) has a
nonforfeitable right to 100
percent of the employee's
accrued benefit derived from
such employer contributions,
and
(II) the requirements of
subparagraph (B) of paragraph
(2) are met with respect to all
such employer contributions.
(iv) Application of certain other
rules.--The rules of subparagraphs
(E)(ii) and (F) of paragraph (12) shall
apply for purposes of subclauses (I)
and (II) of clause (i).
(E) Notice requirements.--
(i) In general.--The requirements of
this subparagraph are met if, within a
reasonable period before each plan
year, each employee eligible to
participate in the arrangement for such
year receives written notice of the
employee's rights and obligations under
the arrangement which--
(I) is sufficiently accurate
and comprehensive to apprise
the employee of such rights and
obligations, and
(II) is written in a manner
calculated to be understood by
the average employee to whom
the arrangement applies.
(ii) Timing and content
requirements.--A notice shall not be
treated as meeting the requirements of
clause (i) with respect to an employee
unless--
(I) the notice explains the
employee's right under the
arrangement to elect not to
have elective contributions
made on the employee's behalf
(or to elect to have such
contributions made at a
different percentage),
(II) in the case of an
arrangement under which the
employee may elect among 2 or
more investment options, the
notice explains how
contributions made under the
arrangement will be invested in
the absence of any investment
election by the employee, and
(III) the employee has a
reasonable period of time after
receipt of the notice described
in subclauses (I) and (II) and
before the first elective
contribution is made to make
either such election.
(14) Special rules relating to hardship
withdrawals.--For purposes of paragraph (2)(B)(i)(IV)--
(A) Amounts which may be withdrawn.--The
following amounts may be distributed upon
hardship of the employee:
(i) Contributions to a profit-sharing
or stock bonus plan to which section
402(e)(3) applies.
(ii) Qualified nonelective
contributions (as defined in subsection
(m)(4)(C)).
(iii) Qualified matching
contributions described in paragraph
(3)(D)(ii)(I).
(iv) Earnings on any contributions
described in clause (i), (ii), or
(iii).
(B) No requirement to take available loan.--A
distribution shall not be treated as failing to
be made upon the hardship of an employee solely
because the employee does not take any
available loan under the plan.
(l) Permitted disparity in plan contributions or benefits.--
(1) In general.--The requirements of this subsection
are met with respect to a plan if--
(A) in the case of a defined contribution
plan, the requirements of paragraph (2) are
met, and
(B) in the case of a defined benefit plan,
the requirements of paragraph (3) are met.
(2) Defined contribution plan.--
(A) In general.--A defined contribution plan
meets the requirements of this paragraph if the
excess contribution percentage does not exceed
the base contribution percentage by more than
the lesser of--
(i) the base contribution percentage,
or
(ii) the greater of--
(I) 5.7 percentage points, or
(II) the percentage equal to
the portion of the rate of tax
under section 3111(a) (in
effect as of the beginning of
the year) which is attributable
to old-age insurance.
(B) Contribution percentages.--For purposes
of this paragraph--
(i) Excess contribution percentage.--
The term ``excess contribution
percentage'' means the percentage of
compensation which is contributed by
the employer under the plan with
respect to that portion of each
participant's compensation in excess of
the integration level.
(ii) Base contribution percentage.--
The term ``base contribution
percentage'' means the percentage of
compensation contributed by the
employer under the plan with respect to
that portion of each participant's
compensation not in excess of the
integration level.
(3) Defined benefit plan.--A defined benefit plan
meets the requirements of this paragraph if--
(A) Excess plans.--
(i) In general.--In the case of a
plan other than an offset plan--
(I) the excess benefit
percentage does not exceed the
base benefit percentage by more
than the maximum excess
allowance,
(II) any optional form of
benefit, preretirement benefit,
actuarial factor, or other
benefit or feature provided
with respect to compensation in
excess of the integration level
is provided with respect to
compensation not in excess of
such level, and
(III) benefits are based on
average annual compensation.
(ii) Benefit percentages.--For
purposes of this subparagraph, the
excess and base benefit percentages
shall be computed in the same manner as
the excess and base contribution
percentages under paragraph (2)(B),
except that such determination shall be
made on the basis of benefits
attributable to employer contributions
rather than contributions.
(B) Offset plans.--In the case of an offset
plan, the plan provides that--
(i) a participant's accrued benefit
attributable to employer contributions
(within the meaning of section
411(c)(1)) may not be reduced (by
reason of the offset) by more than the
maximum offset allowance, and
(ii) benefits are based on average
annual compensation.
(4) Definitions relating to paragraph (3).--For
purposes of paragraph (3)--
(A) Maximum excess allowance.--The maximum
excess allowance is equal to--
(i) in the case of benefits
attributable to any year of service
with the employer taken into account
under the plan, 3/4 of a percentage
point, and
(ii) in the case of total benefits,
3/4 of a percentage point, multiplied
by the participant's years of service
(not in excess of 35) with the employer
taken into account under the plan.
In no event shall the maximum excess allowance
exceed the base benefit percentage.
(B) Maximum offset allowance.--The maximum
offset allowance is equal to--
(i) in the case of benefits
attributable to any year of service
with the employer taken into account
under the plan, 3/4 percent of the
participant's final average
compensation, and
(ii) in the case of total benefits,
3/4 percent of the participant's final
average compensation, multiplied by the
participant's years of service (not in
excess of 35) with the employer taken
into account under the plan.
In no event shall the maximum offset allowance
exceed 50 percent of the benefit which would
have accrued without regard to the offset
reduction.
(C) Reductions.--
(i) In general.--The Secretary shall
prescribe regulations requiring the
reduction of the 3/4 percentage factor
under subparagraph (A) or (B)--
(I) in the case of a plan
other than an offset plan which
has an integration level in
excess of covered compensation,
or
(II) with respect to any
participant in an offset plan
who has final average
compensation in excess of
covered compensation.
(ii) Basis of reductions.--Any
reductions under clause (i) shall be
based on the percentages of
compensation replaced by the employer-
derived portions of primary insurance
amounts under the Social Security Act
for participants with compensation in
excess of covered compensation.
(D) Offset plan.--The term ``offset plan''
means any plan with respect to which the
benefit attributable to employer contributions
for each participant is reduced by an amount
specified in the plan.
(5) Other definitions and special rules.--For
purposes of this subsection--
(A) Integration level.--
(i) In general.--The term
``integration level'' means the amount
of compensation specified under the
plan (by dollar amount or formula) at
or below which the rate at which
contributions or benefits are provided
(expressed as a percentage) is less
than such rate above such amount.
(ii) Limitation.--The integration
level for any year may not exceed the
contribution and benefit base in effect
under section 230 of the Social
Security Act for such year.
(iii) Level to apply to all
participants.--A plan's integration
level shall apply with respect to all
participants in the plan.
(iv) Multiple integration levels.--
Under rules prescribed by the
Secretary, a defined benefit plan may
specify multiple integration levels.
(B) Compensation.--The term ``compensation''
has the meaning given such term by section
414(s).
(C) Average annual compensation.--The term
``average annual compensation'' means the
participant's highest average annual
compensation for--
(i) any period of at least 3
consecutive years, or
(ii) if shorter, the participant's
full period of service.
(D) Final average compensation.--
(i) In general.--The term ``final
average compensation'' means the
participant's average annual
compensation for--
(I) the 3-consecutive year
period ending with the current
year, or
(II) if shorter, the
participant's full period of
service.
(ii) Limitation.--A participant's
final average compensation shall be
determined by not taking into account
in any year compensation in excess of
the contribution and benefit base in
effect under section 230 of the Social
Security Act for such year.
(E) Covered compensation.--
(i) In general.--The term ``covered
compensation'' means, with respect to
an employee, the average of the
contribution and benefit bases in
effect under section 230 of the Social
Security Act for each year in the 35-
year period ending with the year in
which the employee attains the social
security retirement age.
(ii) Computation for any year.--For
purposes of clause (i), the
determination for any year preceding
the year in which the employee attains
the social security retirement age
shall be made by assuming that there is
no increase in the bases described in
clause (i) after the determination year
and before the employee attains the
social security retirement age.
(iii) Social security retirement
age.--For purposes of this
subparagraph, the term ``social
security retirement age'' has the
meaning given such term by section
415(b)(8).
(F) Regulations.--The Secretary shall
prescribe such regulations as are necessary or
appropriate to carry out the purposes of this
subsection, including--
(i) in the case of a defined benefit
plan which provides for unreduced
benefits commencing before the social
security retirement age (as defined in
section 415(b)(8)), rules providing for
the reduction of the maximum excess
allowance and the maximum offset
allowance, and
(ii) in the case of an employee
covered by 2 or more plans of the
employer which fail to meet the
requirements of subsection (a)(4)
(without regard to this subsection),
rules preventing the multiple use of
the disparity permitted under this
subsection with respect to any
employee.
For purposes of clause (i), unreduced benefits
shall not include benefits for disability
(within the meaning of section 223(d) of the
Social Security Act).
(6) Special rule for plan maintained by railroads.--
In determining whether a plan which includes employees
of a railroad employer who are entitled to benefits
under the Railroad Retirement Act of 1974 meets the
requirements of this subsection, rules similar to the
rules set forth in this subsection shall apply. Such
rules shall take into account the employer-derived
portion of the employees' tier 2 railroad retirement
benefits and any supplemental annuity under the
Railroad Retirement Act of 1974.
(m) Nondiscrimination test for matching contributions and
employee contributions.--
(1) In general.--A defined contribution plan shall be
treated as meeting the requirements of subsection
(a)(4) with respect to the amount of any matching
contribution or employee contribution for any plan year
only if the contribution percentage requirement of
paragraph (2) of this subsection is met for such plan
year.
(2) Requirements.--
(A) Contribution percentage requirement.--A
plan meets the contribution percentage
requirement of this paragraph for any plan year
only if the contribution percentage for
eligible highly compensated employees for such
plan year does not exceed the greater of--
(i) 125 percent of such percentage
for all other eligible employees for
the preceding plan year, or
(ii) the lesser of 200 percent of
such percentage for all other eligible
employees for the preceding plan year,
or such percentage for all other
eligible employees for the preceding
plan year plus 2 percentage points.
This subparagraph may be applied by using the
plan year rather than the preceding plan year
if the employer so elects, except that if such
an election is made, it may not be changed
except as provided by the Secretary.
(B) Multiple plans treated as a single
plan.--If two or more plans of an employer to
which matching contributions, employee
contributions, or elective deferrals are made
are treated as one plan for purposes of section
410(b), such plans shall be treated as one plan
for purposes of this subsection. If a highly
compensated employee participates in two or
more plans of an employer to which
contributions to which this subsection applies
are made, all such contributions shall be
aggregated for purposes of this subsection.
(3) Contribution percentage.--For purposes of
paragraph (2), the contribution percentage for a
specified group of employees for a plan year shall be
the average of the ratios (calculated separately for
each employee in such group) of--
(A) the sum of the matching contributions and
employee contributions paid under the plan on
behalf of each such employee for such plan
year, to
(B) the employee's compensation (within the
meaning of section 414(s)) for such plan year.
Under regulations, an employer may elect to take into
account (in computing the contribution percentage)
elective deferrals and qualified nonelective
contributions under the plan or any other plan of the
employer. If matching contributions are taken into
account for purposes of subsection (k)(3)(A)(ii) for
any plan year, such contributions shall not be taken
into account under subparagraph (A) for such year.
Rules similar to the rules of subsection (k)(3)(E)
shall apply for purposes of this subsection.
(4) Definitions.--For purposes of this subsection--
(A) Matching contribution.--The term
``matching contribution'' means--
(i) any employer contribution made to
a defined contribution plan on behalf
of an employee on account of an
employee contribution made by such
employee, and
(ii) any employer contribution made
to a defined contribution plan on
behalf of an employee on account of an
employee's elective deferral.
(B) Elective deferral.--The term ``elective
deferral'' means any employer contribution
described in section 402(g)(3).
(C) Qualified nonelective contributions.--The
term ``qualified nonelective contribution''
means any employer contribution (other than a
matching contribution) with respect to which--
(i) the employee may not elect to
have the contribution paid to the
employee in cash instead of being
contributed to the plan, and
(ii) the requirements of
subparagraphs (B) and (C) of subsection
(k)(2) are met.
(5) Employees taken into consideration.--
(A) In general.--Any employee who is eligible
to make an employee contribution (or, if the
employer takes elective contributions into
account, elective contributions) or to receive
a matching contribution under the plan being
tested under paragraph (1) shall be considered
an eligible employee for purposes of this
subsection.
(B) Certain nonparticipants.--If an employee
contribution is required as a condition of
participation in the plan, any employee who
would be a participant in the plan if such
employee made such a contribution shall be
treated as an eligible employee on behalf of
whom no employer contributions are made.
(C) Special rule for early participation.--If
an employer elects to apply section
410(b)(4)(B) in determining whether a plan
meets the requirements of section 410(b), the
employer may, in determining whether the plan
meets the requirements of paragraph (2),
exclude from consideration all eligible
employees (other than highly compensated
employees) who have not met the minimum age and
service requirements of section 410(a)(1)(A).
(6) Plan not disqualified if excess aggregate
contributions distributed before end of following plan
year.--
(A) In general.--A plan shall not be treated
as failing to meet the requirements of
paragraph (1) for any plan year if, before the
close of the following plan year, the amount of
the excess aggregate contributions for such
plan year (and any income allocable to such
contributions through the end of such year) is
distributed (or, if forfeitable, is forfeited).
Such contributions (and such income) may be
distributed without regard to any other
provision of law.
(B) Excess aggregate contributions.--For
purposes of subparagraph (A), the term ``excess
aggregate contributions'' means, with respect
to any plan year, the excess of--
(i) the aggregate amount of the
matching contributions and employee
contributions (and any qualified
nonelective contribution or elective
contribution taken into account in
computing the contribution percentage)
actually made on behalf of highly
compensated employees for such plan
year, over
(ii) the maximum amount of such
contributions permitted under the
limitations of paragraph (2)(A)
(determined by reducing contributions
made on behalf of highly compensated
employees in order of their
contribution percentages beginning with
the highest of such percentages).
(C) Method of distributing excess aggregate
contributions.--Any distribution of the excess
aggregate contributions for any plan year shall
be made to highly compensated employees on the
basis of the amount of contributions on behalf
of, or by, each such employee. Forfeitures of
excess aggregate contributions may not be
allocated to participants whose contributions
are reduced under this paragraph.
(D) Coordination with subsection (k) and
402(g).--The determination of the amount of
excess aggregate contributions with respect to
a plan shall be made after--
(i) first determining the excess
deferrals (within the meaning of
section 402(g)), and
(ii) then determining the excess
contributions under subsection (k).
(7) Treatment of distributions.--
(A) Additional tax of section 72(t) not
applicable.--No tax shall be imposed under
section 72(t) on any amount required to be
distributed under paragraph (6).
(B) Exclusion of employee contributions.--Any
distribution attributable to employee
contributions shall not be included in gross
income except to the extent attributable to
income on such contributions.
(8) Highly compensated employee.--For purposes of
this subsection, the term ``highly compensated
employee'' has the meaning given to such term by
section 414(q).
(9) Regulations.--The Secretary shall prescribe such
regulations as may be necessary to carry out the
purposes of this subsection and subsection (k),
including regulations permitting appropriate
aggregation of plans and contributions.
(10) Alternative method of satisfying tests.--A
defined contribution plan shall be treated as meeting
the requirements of paragraph (2) with respect to
matching contributions if the plan--
(A) meets the contribution requirements of
subparagraph (B) of subsection (k)(11),
(B) meets the exclusive plan requirements of
subsection (k)(11)(C), and
(C) meets the vesting requirements of section
408(p)(3).
(11) Additional alternative method of satisfying
tests.--
(A) In general.--A defined contribution plan
shall be treated as meeting the requirements of
paragraph (2) with respect to matching
contributions if the plan--
(i) meets the contribution
requirements of subparagraph (B) or (C)
of subsection (k)(12),
(ii) meets the notice requirements of
subsection (k)(12)(D), and
(iii) meets the requirements of
subparagraph (B).
(B) Limitation on matching contributions.--
The requirements of this subparagraph are met
if--
(i) matching contributions on behalf
of any employee may not be made with
respect to an employee's contributions
or elective deferrals in excess of 6
percent of the employee's compensation,
(ii) the rate of an employer's
matching contribution does not increase
as the rate of an employee's
contributions or elective deferrals
increase, and
(iii) the matching contribution with
respect to any highly compensated
employee at any rate of an employee
contribution or rate of elective
deferral is not greater than that with
respect to an employee who is not a
highly compensated employee.
(12) Alternative method for automatic contribution
arrangements.--A defined contribution plan shall be
treated as meeting the requirements of paragraph (2)
with respect to matching contributions if the plan--
(A) is a qualified automatic contribution
arrangement (as defined in subsection (k)(13)),
and
(B) meets the requirements of paragraph
(11)(B).
(13) Cross reference.--For excise tax on certain
excess contributions, see section 4979.
(n) Coordination with qualified domestic relations orders.--
The Secretary shall prescribe such rules or regulations as may
be necessary to coordinate the requirements of subsection
(a)(13)(B) and section 414(p) (and the regulations issued by
the Secretary of Labor thereunder) with the other provisions of
this chapter.
(o) Cross reference.--For exemption from tax of a trust
qualified under this section, see section 501(a).
SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES' TRUST.
(a) Taxability of beneficiary of exempt trust.--Except as
otherwise provided in this section, any amount actually
distributed to any distributee by any employees' trust
described in section 401(a) which is exempt from tax under
section 501(a) shall be taxable to the distributee, in the
taxable year of the distributee in which distributed, under
section 72 (relating to annuities).
(b) Taxability of beneficiary of nonexempt trust.--
(1) Contributions.--Contributions to an employees'
trust made by an employer during a taxable year of the
employer which ends with or within a taxable year of
the trust for which the trust is not exempt from tax
under section 501(a) shall be included in the gross
income of the employee in accordance with section 83
(relating to property transferred in connection with
performance of services), except that the value of the
employee's interest in the trust shall be substituted
for the fair market value of the property for purposes
of applying such section.
(2) Distributions.--The amount actually distributed
or made available to any distributee by any trust
described in paragraph (1) shall be taxable to the
distributee, in the taxable year in which so
distributed or made available, under section 72
(relating to annuities), except that distributions of
income of such trust before the annuity starting date
(as defined in section 72(c)(4)) shall be included in
the gross income of the employee without regard to
section 72(e)(5) (relating to amounts not received as
annuities).
(3) Grantor trusts.--A beneficiary of any trust
described in paragraph (1) shall not be considered the
owner of any portion of such trust under subpart E of
part I of subchapter J (relating to grantors and others
treated as substantial owners).
(4) Failure to meet requirements of section 410(b).--
(A) Highly compensated employees.--If 1 of
the reasons a trust is not exempt from tax
under section 501(a) is the failure of the plan
of which it is a part to meet the requirements
of section 401(a)(26) or 410(b), then a highly
compensated employee shall, in lieu of the
amount determined under paragraph (1) or (2)
include in gross income for the taxable year
with or within which the taxable year of the
trust ends an amount equal to the vested
accrued benefit of such employee (other than
the employee's investment in the contract) as
of the close of such taxable year of the trust.
(B) Failure to meet coverage tests.--If a
trust is not exempt from tax under section
501(a) for any taxable year solely because such
trust is part of a plan which fails to meet the
requirements of section 401(a)(26) or 410(b),
paragraphs (1) and (2) shall not apply by
reason of such failure to any employee who was
not a highly compensated employee during--
(i) such taxable year, or
(ii) any preceding period for which
service was creditable to such employee
under the plan.
(C) Highly compensated employee.--For
purposes of this paragraph, the term ``highly
compensated employee'' has the meaning given
such term by section 414(q).
(c) Rules applicable to rollovers from exempt trusts.--
(1) Exclusion from income.--If--
(A) any portion of the balance to the credit
of an employee in a qualified trust is paid to
the employee in an eligible rollover
distribution,
(B) the distributee transfers any portion of
the property received in such distribution to
an eligible retirement plan, and
(C) in the case of a distribution of property
other than money, the amount so transferred
consists of the property distributed,
then such distribution (to the extent so transferred)
shall not be includible in gross income for the taxable
year in which paid.
(2) Maximum amount which may be rolled over.--In the
case of any eligible rollover distribution, the maximum
amount transferred to which paragraph (1) applies shall
not exceed the portion of such distribution which is
includible in gross income (determined without regard
to paragraph (1)). The preceding sentence shall not
apply to such distribution to the extent--
(A) such portion is transferred in a direct
trustee-to-trustee transfer to a qualified
trust or to an annuity contract described in
section 403(b) and such trust or contract
provides for separate accounting for amounts so
transferred (and earnings thereon), including
separately accounting for the portion of such
distribution which is includible in gross
income and the portion of such distribution
which is not so includible, or
(B) such portion is transferred to an
eligible retirement plan described in clause
(i) or (ii) of paragraph (8)(B).
In the case of a transfer described in subparagraph (A)
or (B), the amount transferred shall be treated as
consisting first of the portion of such distribution
that is includible in gross income (determined without
regard to paragraph (1)).
(3) Time limit on transfers.--
(A) In general.--Except as provided in
subparagraphs (B) and (C), paragraph (1) shall
not apply to any transfer of a distribution
made after the 60th day following the day on
which the distributee received the property
distributed.
(B) Hardship exception.--The Secretary may
waive the 60-day requirement under subparagraph
(A) where the failure to waive such requirement
would be against equity or good conscience,
including casualty, disaster, or other events
beyond the reasonable control of the individual
subject to such requirement.
(C) Rollover of certain plan loan offset
amounts.--
(i) In general.--In the case of a
qualified plan loan offset amount,
paragraph (1) shall not apply to any
transfer of such amount made after the
due date (including extensions) for
filing the return of tax for the
taxable year in which such amount is
treated as distributed from a qualified
employer plan.
(ii) Qualified plan loan offset
amount.--For purposes of this
subparagraph, the term ``qualified plan
loan offset amount'' means a plan loan
offset amount which is treated as
distributed from a qualified employer
plan to a participant or beneficiary
solely by reason of--
(I) the termination of the
qualified employer plan, or
(II) the failure to meet the
repayment terms of the loan
from such plan because of the
severance from employment of
the participant.
(iii) Plan loan offset amount.--For
purposes of clause (ii), the term
``plan loan offset amount'' means the
amount by which the participant's
accrued benefit under the plan is
reduced in order to repay a loan from
the plan.
(iv) Limitation.--This subparagraph
shall not apply to any plan loan offset
amount unless such plan loan offset
amount relates to a loan to which
section 72(p)(1) does not apply by
reason of section 72(p)(2).
(v) Qualified employer plan.--For
purposes of this subsection, the term
``qualified employer plan'' has the
meaning given such term by section
72(p)(4).
(4) Eligible rollover distribution.--For purposes of
this subsection, the term ``eligible rollover
distribution'' means any distribution to an employee of
all or any portion of the balance to the credit of the
employee in a qualified trust; except that such term
shall not include--
(A) any distribution which is one of a series
of substantially equal periodic payments (not
less frequently than annually) made--
(i) for the life (or life expectancy)
of the employee or the joint lives (or
joint life expectancies) of the
employee and the employee's designated
beneficiary, or
(ii) for a specified period of 10
years or more,
(B) any distribution to the extent such
distribution is required under section
401(a)(9), and
(C) any distribution which is made upon
hardship of the employee.
If all or any portion of a distribution during 2009 is
treated as an eligible rollover distribution but would
not be so treated if the minimum distribution
requirements under section 401(a)(9) had applied during
2009, such distribution shall not be treated as an
eligible rollover distribution for purposes of section
401(a)(31) or 3405(c) or subsection (f) of this
section.
(5) Transfer treated as rollover contribution under
section 408.--For purposes of this title, a transfer to
an eligible retirement plan described in clause (i) or
(ii) of paragraph (8)(B) resulting in any portion of a
distribution being excluded from gross income under
paragraph (1) shall be treated as a rollover
contribution described in section 408(d)(3).
(6) Sales of distributed property.--For purposes of
this subsection--
(A) Transfer of proceeds from sale of
distributed property treated as transfer of
distributed property.--The transfer of an
amount equal to any portion of the proceeds
from the sale of property received in the
distribution shall be treated as the transfer
of property received in the distribution.
(B) Proceeds attributable to increase in
value.--The excess of fair market value of
property on sale over its fair market value on
distribution shall be treated as property
received in the distribution.
(C) Designation where amount of distribution
exceeds rollover contribution.--In any case
where part or all of the distribution consists
of property other than money--
(i) the portion of the money or other
property which is to be treated as
attributable to amounts not included in
gross income, and
(ii) the portion of the money or
other property which is to be treated
as included in the rollover
contribution,
shall be determined on a ratable basis unless
the taxpayer designates otherwise. Any
designation under this subparagraph for a
taxable year shall be made not later than the
time prescribed by law for filing the return
for such taxable year (including extensions
thereof). Any such designation, once made,
shall be irrevocable.
(D) Nonrecognition of gain or loss.--No gain
or loss shall be recognized on any sale
described in subparagraph (A) to the extent
that an amount equal to the proceeds is
transferred pursuant to paragraph (1).
(7) Special rule for frozen deposits.--
(A) In general.--The 60-day period described
in paragraph (3) shall not--
(i) include any period during which
the amount transferred to the employee
is a frozen deposit, or
(ii) end earlier than 10 days after
such amount ceases to be a frozen
deposit.
(B) Frozen deposits.--For purposes of this
subparagraph, the term ``frozen deposit'' means
any deposit which may not be withdrawn because
of--
(i) the bankruptcy or insolvency of
any financial institution, or
(ii) any requirement imposed by the
State in which such institution is
located by reason of the bankruptcy or
insolvency (or threat thereof) of 1 or
more financial institutions in such
State.
A deposit shall not be treated as a frozen
deposit unless on at least 1 day during the 60-
day period described in paragraph (3) (without
regard to this paragraph) such deposit is
described in the preceding sentence.
(8) Definitions.--For purposes of this subsection--
(A) Qualified trust.--The term ``qualified
trust'' means an employees' trust described in
section 401(a) which is exempt from tax under
section 501(a).
(B) Eligible retirement plan.--The term
``eligible retirement plan'' means--
(i) an individual retirement account
described in section 408(a),
(ii) an individual retirement annuity
described in section 408(b) (other than
an endowment contract),
(iii) a qualified trust,
(iv) an annuity plan described in
section 403(a),
(v) an eligible deferred compensation
plan described in section 457(b) which
is maintained by an eligible employer
described in section 457(e)(1)(A), and
(vi) an annuity contract described in
section 403(b).
If any portion of an eligible rollover
distribution is attributable to payments or
distributions from a designated Roth account
(as defined in section 402A), an eligible
retirement plan with respect to such portion
shall include only another designated Roth
account and a Roth IRA.
(9) Rollover where spouse receives distribution after
death of employee.--If any distribution attributable to
an employee is paid to the spouse of the employee after
the employee's death, the preceding provisions of this
subsection shall apply to such distribution in the same
manner as if the spouse were the employee.
(10) Separate accounting.--Unless a plan described in
clause (v) of paragraph (8)(B) agrees to separately
account for amounts rolled into such plan from eligible
retirement plans not described in such clause, the plan
described in such clause may not accept transfers or
rollovers from such retirement plans.
(11) Distributions to inherited individual retirement
plan of nonspouse beneficiary.--
(A) In general.--If, with respect to any
portion of a distribution from an eligible
retirement plan described in paragraph
(8)(B)(iii) of a deceased employee, a direct
trustee-to-trustee transfer is made to an
individual retirement plan described in clause
(i) or (ii) of paragraph (8)(B) established for
the purposes of receiving the distribution on
behalf of an individual who is a designated
beneficiary (as defined by section
401(a)(9)(E)) of the employee and who is not
the surviving spouse of the employee--
(i) the transfer shall be treated as
an eligible rollover distribution,
(ii) the individual retirement plan
shall be treated as an inherited
individual retirement account or
individual retirement annuity (within
the meaning of section 408(d)(3)(C))
for purposes of this title, and
(iii) section 401(a)(9)(B) (other
than clause (iv) thereof) shall apply
to such plan.
(B) Certain trusts treated as
beneficiaries.--For purposes of this paragraph,
to the extent provided in rules prescribed by
the Secretary, a trust maintained for the
benefit of one or more designated beneficiaries
shall be treated in the same manner as a
designated beneficiary.
(d) Taxability of beneficiary of certain foreign situs
trusts.--For purposes of subsections (a), (b), and (c), a stock
bonus, pension, or profit-sharing trust which would qualify for
exemption from tax under section 501(a) except for the fact
that it is a trust created or organized outside the United
States shall be treated as if it were a trust exempt from tax
under section 501(a).
(e) Other rules applicable to exempt trusts.--
(1) Alternate payees.--
(A) Alternate payee treated as distributee.--
For purposes of subsection (a) and section 72,
an alternate payee who is the spouse or former
spouse of the participant shall be treated as
the distributee of any distribution or payment
made to the alternate payee under a qualified
domestic relations order (as defined in section
414(p)).
(B) Rollovers.--If any amount is paid or
distributed to an alternate payee who is the
spouse or former spouse of the participant by
reason of any qualified domestic relations
order (within the meaning of section 414(p)),
subsection (c) shall apply to such distribution
in the same manner as if such alternate payee
were the employee.
(2) Distributions by United States to nonresident
aliens.--The amount includible under subsection (a) in
the gross income of a nonresident alien with respect to
a distribution made by the United States in respect of
services performed by an employee of the United States
shall not exceed an amount which bears the same ratio
to the amount includible in gross income without regard
to this paragraph as--
(A) the aggregate basic pay paid by the
United States to such employee for such
services, reduced by the amount of such basic
pay which was not includible in gross income by
reason of being from sources without the United
States, bears to
(B) the aggregate basic pay paid by the
United States to such employee for such
services.
In the case of distributions under the civil service
retirement laws, the term ``basic pay'' shall have the
meaning provided in section 8331(3) of title 5, United
States Code.
(3) Cash or deferred arrangements.--For purposes of
this title, contributions made by an employer on behalf
of an employee to a trust which is a part of a
qualified cash or deferred arrangement (as defined in
section 401(k)(2)) or which is part of a salary
reduction agreement under section 403(b) shall not be
treated as distributed or made available to the
employee nor as contributions made to the trust by the
employee merely because the arrangement includes
provisions under which the employee has an election
whether the contribution will be made to the trust or
received by the employee in cash.
(4) Net unrealized appreciation.--
(A) Amounts attributable to employee
contributions.--For purposes of subsection (a)
and section 72, in the case of a distribution
other than a lump sum distribution, the amount
actually distributed to any distributee from a
trust described in subsection (a) shall not
include any net unrealized appreciation in
securities of the employer corporation
attributable to amounts contributed by the
employee (other than deductible employee
contributions within the meaning of section
72(o)(5)). This subparagraph shall not apply to
a distribution to which subsection (c) applies.
(B) Amounts attributable to employer
contributions.--For purposes of subsection (a)
and section 72, in the case of any lump sum
distribution which includes securities of the
employer corporation, there shall be excluded
from gross income the net unrealized
appreciation attributable to that part of the
distribution which consists of securities of
the employer corporation. In accordance with
rules prescribed by the Secretary, a taxpayer
may elect, on the return of tax on which a lump
sum distribution is required to be included,
not to have this subparagraph apply to such
distribution.
(C) Determination of amounts and
adjustments.--For purposes of subparagraphs (A)
and (B), net unrealized appreciation and the
resulting adjustments to basis shall be
determined in accordance with regulations
prescribed by the Secretary.
(D) Lump-sum distribution.--For purposes of
this paragraph--
(i) In general.--The term ``lump-sum
distribution'' means the distribution
or payment within one taxable year of
the recipient of the balance to the
credit of an employee which becomes
payable to the recipient--
(I) on account of the
employee's death,
(II) after the employee
attains age 591/2,
(III) on account of the
employee's separation from
service, or
(IV) after the employee has
become disabled (within the
meaning of section 72(m)(7)),
from a trust which forms a part of a plan
described in section 401(a) and which is exempt
from tax under section 501 or from a plan
described in section 403(a). Subclause (III) of
this clause shall be applied only with respect
to an individual who is an employee without
regard to section 401(c)(1), and subclause (IV)
shall be applied only with respect to an
employee within the meaning of section
401(c)(1). For purposes of this clause, a
distribution to two or more trusts shall be
treated as a distribution to one recipient. For
purposes of this paragraph, the balance to the
credit of the employee does not include the
accumulated deductible employee contributions
under the plan (within the meaning of section
72(o)(5)).
(ii) Aggregation of certain trusts
and plans.--For purposes of determining
the balance to the credit of an
employee under clause (i)--
(I) all trusts which are part
of a plan shall be treated as a
single trust, all pension plans
maintained by the employer
shall be treated as a single
plan, all profit-sharing plans
maintained by the employer
shall be treated as a single
plan, and all stock bonus plans
maintained by the employer
shall be treated as a single
plan, and
(II) trusts which are not
qualified trusts under section
401(a) and annuity contracts
which do not satisfy the
requirements of section
404(a)(2) shall not be taken
into account.
(iii) Community property laws.--The
provisions of this paragraph shall be
applied without regard to community
property laws.
(iv) Amounts subject to penalty.--
This paragraph shall not apply to
amounts described in subparagraph (A)
of section 72(m)(5) to the extent that
section 72(m)(5) applies to such
amounts.
(v) Balance to credit of employee not
to include amounts payable under
qualified domestic relations order.--
For purposes of this paragraph, the
balance to the credit of an employee
shall not include any amount payable to
an alternate payee under a qualified
domestic relations order (within the
meaning of section 414(p)).
(vi) Transfers to cost-of-living
arrangement not treated as
distribution.--For purposes of this
paragraph, the balance to the credit of
an employee under a defined
contribution plan shall not include any
amount transferred from such defined
contribution plan to a qualified cost-
of-living arrangement (within the
meaning of section 415(k)(2)) under a
defined benefit plan.
(vii) Lump-sum distributions of
alternate payees.--If any distribution
or payment of the balance to the credit
of an employee would be treated as a
lump-sum distribution, then, for
purposes of this paragraph, the payment
under a qualified domestic relations
order (within the meaning of section
414(p)) of the balance to the credit of
an alternate payee who is the spouse or
former spouse of the employee shall be
treated as a lump-sum distribution. For
purposes of this clause, the balance to
the credit of the alternate payee shall
not include any amount payable to the
employee.
(E) Definitions relating to securities.--For
purposes of this paragraph--
(i) Securities.--The term
``securities'' means only shares of
stock and bonds or debentures issued by
a corporation with interest coupons or
in registered form.
(ii) Securities of the employer.--The
term ``securities of the employer
corporation'' includes securities of a
parent or subsidiary corporation (as
defined in subsections (e) and (f) of
section 424) of the employer
corporation.
(6) Direct trustee-to-trustee transfers.--Any amount
transferred in a direct trustee-to-trustee transfer in
accordance with section 401(a)(31) shall not be
includible in gross income for the taxable year of such
transfer.
(f) Written explanation to recipients of distributions
eligible for rollover treatment.--
(1) In general.--The plan administrator of any plan
shall, within a reasonable period of time before making
an eligible rollover distribution, provide a written
explanation to the recipient--
(A) of the provisions under which the
recipient may have the distribution directly
transferred to an eligible retirement plan and
that the automatic distribution by direct
transfer applies to certain distributions in
accordance with section 401(a)(31)(B),
(B) of the provision which requires the
withholding of tax on the distribution if it is
not directly transferred to an eligible
retirement plan,
(C) of the provisions under which the
distribution will not be subject to tax if
transferred to an eligible retirement plan
within 60 days after the date on which the
recipient received the distribution,
(D) if applicable, of the provisions of
subsections (d) and (e) of this section, and
(E) of the provisions under which
distributions from the eligible retirement plan
receiving the distribution may be subject to
restrictions and tax consequences which are
different from those applicable to
distributions from the plan making such
distribution.
(2) Definitions.--For purposes of this subsection--
(A) Eligible rollover distribution.--The term
``eligible rollover distribution'' has the same
meaning as when used in subsection (c) of this
section, paragraph (4) of section 403(a),
subparagraph (A) of section 403(b)(8), or
subparagraph (A) of section 457(e)(16). Such
term shall include any distribution to a
designated beneficiary which would be treated
as an eligible rollover distribution by reason
of subsection (c)(11), or section 403(a)(4)(B),
403(b)(8)(B), or 457(e)(16)(B), if the
requirements of subsection (c)(11) were
satisfied.
(B) Eligible retirement plan.--The term
``eligible retirement plan'' has the meaning
given such term by subsection (c)(8)(B).
(g) Limitation on exclusion for elective deferrals.--
(1) In general.--
(A) Limitation.--Notwithstanding subsections
(e)(3) and (h)(1)(B), the elective deferrals of
any individual for any taxable year shall be
included in such individual's gross income to
the extent the amount of such deferrals for the
taxable year exceeds the applicable dollar
amount. The preceding sentence shall not apply
to the portion of such excess as does not
exceed the designated Roth contributions of the
individual for the taxable year.
(B) Applicable dollar amount.--For purposes
of subparagraph (A), the applicable dollar
amount is $15,000.
(C) Catch-up contributions.--In addition to
subparagraph (A), in the case of an eligible
participant (as defined in section 414(v)),
gross income shall not include elective
deferrals in excess of the applicable dollar
amount under subparagraph (B) to the extent
that the amount of such elective deferrals does
not exceed the applicable dollar amount under
section 414(v)(2)(B)(i) for the taxable year
(without regard to the treatment of the
elective deferrals by an applicable employer
plan under section 414(v)).
(2) Distribution of excess deferrals.--
(A) In general.--If any amount (hereinafter
in this paragraph referred to as ``excess
deferrals'') is included in the gross income of
an individual under paragraph (1) (or would be
included but for the last sentence thereof) for
any taxable year--
(i) not later than the 1st March 1
following the close of the taxable
year, the individual may allocate the
amount of such excess deferrals among
the plans under which the deferrals
were made and may notify each such plan
of the portion allocated to it, and
(ii) not later than the 1st April 15
following the close of the taxable
year, each such plan may distribute to
the individual the amount allocated to
it under clause (i) (and any income
allocable to such amount through the
end of such taxable year).
The distribution described in clause (ii) may
be made notwithstanding any other provision of
law.
(B) Treatment of distribution under section
401(k).--Except to the extent provided under
rules prescribed by the Secretary,
notwithstanding the distribution of any portion
of an excess deferral from a plan under
subparagraph (A)(ii), such portion shall, for
purposes of applying section 401(k)(3)(A)(ii),
be treated as an employer contribution.
(C) Taxation of distribution.--In the case of
a distribution to which subparagraph (A)
applies--
(i) except as provided in clause
(ii), such distribution shall not be
included in gross income, and
(ii) any income on the excess
deferral shall, for purposes of this
chapter, be treated as earned and
received in the taxable year in which
such income is distributed.
No tax shall be imposed under section 72(t) on
any distribution described in the preceding
sentence.
(D) Partial distributions.--If a plan
distributes only a portion of any excess
deferral and income allocable thereto, such
portion shall be treated as having been
distributed ratably from the excess deferral
and the income.
(3) Elective deferrals.--For purposes of this
subsection, the term ``elective deferrals'' means, with
respect to any taxable year, the sum of--
(A) any employer contribution under a
qualified cash or deferred arrangement (as
defined in section 401(k)) to the extent not
includible in gross income for the taxable year
under subsection (e)(3) (determined without
regard to this subsection),
(B) any employer contribution to the extent
not includible in gross income for the taxable
year under subsection (h)(1)(B) (determined
without regard to this subsection),
(C) any employer contribution to purchase an
annuity contract under section 403(b) under a
salary reduction agreement (within the meaning
of section 3121(a)(5)(D)), and
(D) any elective employer contribution under
section 408(p)(2)(A)(i).
An employer contribution shall not be treated as an
elective deferral described in subparagraph (C) if
under the salary reduction agreement such contribution
is made pursuant to a one-time irrevocable election
made by the employee at the time of initial eligibility
to participate in the agreement or is made pursuant to
a similar arrangement involving a one-time irrevocable
election specified in regulations.
(4) Cost-of-living adjustment.--In the case of
taxable years beginning after December 31, 2006, the
Secretary shall adjust the $15,000 amount under
paragraph (1)(B) at the same time and in the same
manner as under section 415(d), except that the base
period shall be the calendar quarter beginning July 1,
2005, and any increase under this paragraph which is
not a multiple of $500 shall be rounded to the next
lowest multiple of $500.
(5) Disregard of community property laws.--This
subsection shall be applied without regard to community
property laws.
(6) Coordination with section 72.--For purposes of
applying section 72, any amount includible in gross
income for any taxable year under this subsection but
which is not distributed from the plan during such
taxable year shall not be treated as investment in the
contract.
(7) Special rule for certain organizations.--
(A) In general.--In the case of a qualified
employee of a qualified organization, with
respect to employer contributions described in
paragraph (3)(C) made by such organization, the
limitation of paragraph (1) for any taxable
year shall be increased by whichever of the
following is the least:
(i) $3,000,
(ii) $15,000 reduced by the sum of--
(I) the amounts not included
in gross income for prior
taxable years by reason of this
paragraph, plus
(II) the aggregate amount of
designated Roth contributions
(as defined in section 402A(c))
permitted for prior taxable
years by reason of this
paragraph, or
(iii) the excess of $5,000 multiplied
by the number of years of service of
the employee with the qualified
organization over the employer
contributions described in paragraph
(3) made by the organization on behalf
of such employee for prior taxable
years (determined in the manner
prescribed by the Secretary).
(B) Qualified organization.--For purposes of
this paragraph, the term ``qualified
organization'' means any educational
organization, hospital, home health service
agency, health and welfare service agency,
church, or convention or association of
churches. Such term includes any organization
described in section 414(e)(3)(B)(ii). Terms
used in this subparagraph shall have the same
meaning as when used in section 415(c)(4) (as
in effect before the enactment of the Economic
Growth and Tax Relief Reconciliation Act of
2001).
(C) Qualified employee.--For purposes of this
paragraph, the term ``qualified employee''
means any employee who has completed 15 years
of service with the qualified organization.
(D) Years of service.--For purposes of this
paragraph, the term ``years of service'' has
the meaning given such term by section 403(b).
(8) Matching contributions on behalf of self-employed
individuals not treated as elective employer
contributions.--Except as provided in section
401(k)(3)(D)(ii), any matching contribution described
in section 401(m)(4)(A) which is made on behalf of a
self-employed individual (as defined in section 401(c))
shall not be treated as an elective employer
contribution under a qualified cash or deferred
arrangement (as defined in section 401(k)) for purposes
of this title.
(h) Special rules for simplified employee pensions.--For
purposes of this chapter--
(1) In general.--Except as provided in paragraph (2),
contributions made by an employer on behalf of an
employee to an individual retirement plan pursuant to a
simplified employee pension (as defined in section
408(k))--
(A) shall not be treated as distributed or
made available to the employee or as
contributions made by the employee, and
(B) if such contributions are made pursuant
to an arrangement under section 408(k)(6) under
which an employee may elect to have the
employer make contributions to the simplified
employee pension on behalf of the employee,
shall not be treated as distributed or made
available or as contributions made by the
employee merely because the simplified employee
pension includes provisions for such election.
(2) Limitations on employer contributions.--
Contributions made by an employer to a simplified
employee pension with respect to an employee for any
year shall be treated as distributed or made available
to such employee and as contributions made by the
employee to the extent such contributions exceed the
lesser of--
(A) 25 percent of the compensation (within
the meaning of section 414(s)) from such
employer includible in the employee's gross
income for the year (determined without regard
to the employer contributions to the simplified
employee pension), or
(B) the limitation in effect under section
415(c)(1)(A), reduced in the case of any highly
compensated employee (within the meaning of
section 414(q)) by the amount taken into
account with respect to such employee under
section 408(k)(3)(D).
(3) Distributions.--Any amount paid or distributed
out of an individual retirement plan pursuant to a
simplified employee pension shall be included in gross
income by the payee or distributee, as the case may be,
in accordance with the provisions of section 408(d).
(i) Treatment of self-employed individuals.--For purposes of
this section, except as otherwise provided in subsection
(e)(4)(D)(i), the term ``employee'' includes a self-employed
individual (as defined in section 401(c)(1)(B)) and the
employer of such individual shall be the person treated as his
employer under section 401(c)(4).
(j) Effect of disposition of stock by plan on net unrealized
appreciation.--
(1) In general.--For purposes of subsection (e)(4),
in the case of any transaction to which this subsection
applies, the determination of net unrealized
appreciation shall be made without regard to such
transaction.
(2) Transaction to which subsection applies.--This
subsection shall apply to any transaction in which--
(A) the plan trustee exchanges the plan's
securities of the employer corporation for
other such securities, or
(B) the plan trustee disposes of securities
of the employer corporation and uses the
proceeds of such disposition to acquire
securities of the employer corporation within
90 days (or such longer period as the Secretary
may prescribe), except that this subparagraph
shall not apply to any employee with respect to
whom a distribution of money was made during
the period after such disposition and before
such acquisition.
(k) Treatment of simple retirement accounts.--Rules similar
to the rules of paragraphs (1) and (3) of subsection (h) shall
apply to contributions and distributions with respect to a
simple retirement account under section 408(p).
(l) Distributions from governmental plans for health and
long-term care insurance.--
(1) In general.--In the case of an employee who is an
eligible retired public safety officer who makes the
election described in paragraph (6) with respect to any
taxable year of such employee, gross income of such
employee for such taxable year does not include any
distribution from an eligible retirement plan
maintained by the employer described in paragraph
(4)(B) to the extent that the aggregate amount of such
distributions does not exceed the amount paid by such
employee for qualified health insurance premiums for
such taxable year.
(2) Limitation.--The amount which may be excluded
from gross income for the taxable year by reason of
paragraph (1) shall not exceed $3,000.
(3) Distributions must otherwise be includible.--
(A) In general.--An amount shall be treated
as a distribution for purposes of paragraph (1)
only to the extent that such amount would be
includible in gross income without regard to
paragraph (1).
(B) Application of section 72.--
Notwithstanding section 72, in determining the
extent to which an amount is treated as a
distribution for purposes of subparagraph (A),
the aggregate amounts distributed from an
eligible retirement plan in a taxable year (up
to the amount excluded under paragraph (1))
shall be treated as includible in gross income
(without regard to subparagraph (A)) to the
extent that such amount does not exceed the
aggregate amount which would have been so
includible if all amounts to the credit of the
eligible public safety officer in all eligible
retirement plans maintained by the employer
described in paragraph (4)(B) were distributed
during such taxable year and all such plans
were treated as 1 contract for purposes of
determining under section 72 the aggregate
amount which would have been so includible.
Proper adjustments shall be made in applying
section 72 to other distributions in such
taxable year and subsequent taxable years.
(4) Definitions.--For purposes of this subsection--
(A) Eligible retirement plan.--For purposes
of paragraph (1), the term ``eligible
retirement plan'' means a governmental plan
(within the meaning of section 414(d)) which is
described in clause (iii), (iv), (v), or (vi)
of subsection (c)(8)(B).
(B) Eligible retired public safety officer.--
The term ``eligible retired public safety
officer'' means an individual who, by reason of
disability or attainment of normal retirement
age, is separated from service as a public
safety officer with the employer who maintains
the eligible retirement plan from which
distributions subject to paragraph (1) are
made.
(C) Public safety officer.--The term ``public
safety officer'' shall have the same meaning
given such term by section 1204(9)(A) of the
Omnibus Crime Control and Safe Streets Act of
1968 (42 U.S.C. 3796b(9)(A)), as in effect
immediately before the enactment of the
National Defense Authorization Act for Fiscal
Year 2013.
(D) Qualified health insurance premiums.--The
term ``qualified health insurance premiums''
means premiums for coverage for the eligible
retired public safety officer[, his spouse, and
dependents] and the spouse and dependents of
such officer (as defined in section 152), by an
accident or health plan or qualified long-term
care insurance contract (as defined in section
7702B(b)).
(5) Special rules.--For purposes of this subsection--
(A) Direct payment to insurer required.--
Paragraph (1) shall only apply to a
distribution if payment of the premiums is made
directly to the provider of the accident or
health plan or qualified long-term care
insurance contract by deduction from a
distribution from the eligible retirement plan.
(B) Related plans treated as 1.--All eligible
retirement plans of an employer shall be
treated as a single plan.
(6) Election described.--
(A) In general.--For purposes of paragraph
(1), an election is described in this paragraph
if the election is made by an employee after
separation from service with respect to amounts
not distributed from an eligible retirement
plan to have amounts from such plan distributed
in order to pay for qualified health insurance
premiums.
(B) Special rule.--A plan shall not be
treated as violating the requirements of
section 401, or as engaging in a prohibited
transaction for purposes of section 503(b),
merely because it provides for an election with
respect to amounts that are otherwise
distributable under the plan or merely because
of a distribution made pursuant to an election
described in subparagraph (A).
(7) Coordination with medical expense deduction.--The
amounts excluded from gross income under paragraph (1)
shall not be taken into account under section 213.
(8) Coordination with deduction for health insurance
costs of self-employed individuals.--The amounts
excluded from gross income under paragraph (1) shall
not be taken into account under section 162(l).
* * * * * * *
SEC. 408. INDIVIDUAL RETIREMENT ACCOUNTS.
(a) Individual retirement account.--For purposes of this
section, the term ``individual retirement account'' means a
trust created or organized in the United States for the
exclusive benefit of an individual or his beneficiaries, but
only if the written governing instrument creating the trust
meets the following requirements:
(1) Except in the case of a rollover contribution
described in subsection (d)(3) or in section 402(c),
403(a)(4), 403(b)(8), or 457(e)(16), no contribution
will be accepted unless it is in cash, and
contributions will not be accepted for the taxable year
on behalf of any individual in excess of the amount in
effect for such taxable year under section
219(b)(1)(A).
(2) The trustee is a bank (as defined in subsection
(n)) or such other person who demonstrates to the
satisfaction of the Secretary that the manner in which
such other person will administer the trust will be
consistent with the requirements of this section.
(3) No part of the trust funds will be invested in
life insurance contracts.
(4) The interest of an individual in the balance in
his account is nonforfeitable.
(5) The assets of the trust will not be commingled
with other property except in a common trust fund or
common investment fund.
(6) Under regulations prescribed by the Secretary,
rules similar to the rules of section 401(a)(9) and the
incidental death benefit requirements of section 401(a)
shall apply to the distribution of the entire interest
of an individual for whose benefit the trust is
maintained.
(b) Individual retirement annuity.--For purposes of this
section, the term ``individual retirement annuity'' means an
annuity contract, or an endowment contract (as determined under
regulations prescribed by the Secretary), issued by an
insurance company which meets the following requirements:
(1) The contract is not transferable by the owner.
(2) Under the contract--
(A) the premiums are not fixed,
(B) the annual premium on behalf of any
individual will not exceed the dollar amount in
effect under section 219(b)(1)(A), and
(C) any refund of premiums will be applied
before the close of the calendar year following
the year of the refund toward the payment of
future premiums or the purchase of additional
benefits.
(3) Under regulations prescribed by the Secretary,
rules similar to the rules of section 401(a)(9) and the
incidental death benefit requirements of section 401(a)
shall apply to the distribution of the entire interest
of the owner.
(4) The entire interest of the owner is
nonforfeitable.
Such term does not include such an annuity contract for any
taxable year of the owner in which it is disqualified on the
application of subsection (e) or for any subsequent taxable
year. For purposes of this subsection, no contract shall be
treated as an endowment contract if it matures later than the
taxable year in which the individual in whose name such
contract is purchased attains age 701/2; if it is not for the
exclusive benefit of the individual in whose name it is
purchased or his beneficiaries; or if the aggregate annual
premiums under all such contracts purchased in the name of such
individual for any taxable year exceed the dollar amount in
effect under section 219(b)(1)(A).
(c) Accounts established by employers and certain
associations of employees.--A trust created or organized in the
United States by an employer for the exclusive benefit of his
employees or their beneficiaries, or by an association of
employees (which may include employees within the meaning of
section 401(c)(1)) for the exclusive benefit of its members or
their beneficiaries, shall be treated as an individual
retirement account (described in subsection (a)), but only if
the written governing instrument creating the trust meets the
following requirements:
(1) The trust satisfies the requirements of
paragraphs (1) through (6) of subsection (a).
(2) There is a separate accounting for the interest
of each employee or member (or spouse of an employee or
member).
The assets of the trust may be held in a common fund for the
account of all individuals who have an interest in the trust.
(d) Tax treatment of distributions.--
(1) In general.--Except as otherwise provided in this
subsection, any amount paid or distributed out of an
individual retirement plan shall be included in gross
income by the payee or distributee, as the case may be,
in the manner provided under section 72.
(2) Special rules for applying section 72.--For
purposes of applying section 72 to any amount described
in paragraph (1)--
(A) all individual retirement plans shall be
treated as 1 contract,
(B) all distributions during any taxable year
shall be treated as 1 distribution, and
(C) the value of the contract, income on the
contract, and investment in the contract shall
be computed as of the close of the calendar
year in which the taxable year begins.
For purposes of subparagraph (C), the value of the
contract shall be increased by the amount of any
distributions during the calendar year.
(3) Rollover contribution.--An amount is described in
this paragraph as a rollover contribution if it meets
the requirements of subparagraphs (A) and (B).
(A) In general.--Paragraph (1) does not apply
to any amount paid or distributed out of an
individual retirement account or individual
retirement annuity to the individual for whose
benefit the account or annuity is maintained
if--
(i) the entire amount received
(including money and any other
property) is paid into an individual
retirement account or individual
retirement annuity (other than an
endowment contract) for the benefit of
such individual not later than the 60th
day after the day on which he receives
the payment or distribution; or
(ii) the entire amount received
(including money and any other
property) is paid into an eligible
retirement plan for the benefit of such
individual not later than the 60th day
after the date on which the payment or
distribution is received, except that
the maximum amount which may be paid
into such plan may not exceed the
portion of the amount received which is
includible in gross income (determined
without regard to this paragraph).
For purposes of clause (ii), the term
``eligible retirement plan'' means an eligible
retirement plan described in clause (iii),
(iv), (v), or (vi) of section 402(c)(8)(B).
(B) Limitation.--This paragraph does not
apply to any amount described in subparagraph
(A)(i) received by an individual from an
individual retirement account or individual
retirement annuity if at any time during the 1-
year period ending on the day of such receipt
such individual received any other amount
described in that subparagraph from an
individual retirement account or an individual
retirement annuity which was not includible in
his gross income because of the application of
this paragraph.
(C) Denial of rollover treatment for
inherited accounts, etc..--
(i) In general.--In the case of an
inherited individual retirement account
or individual retirement annuity--
(I) this paragraph shall not
apply to any amount received by
an individual from such an
account or annuity (and no
amount transferred from such
account or annuity to another
individual retirement account
or annuity shall be excluded
from gross income by reason of
such transfer), and
(II) such inherited account
or annuity shall not be treated
as an individual retirement
account or annuity for purposes
of determining whether any
other amount is a rollover
contribution.
(ii) Inherited individual retirement
account or annuity.--An individual
retirement account or individual
retirement annuity shall be treated as
inherited if--
(I) the individual for whose
benefit the account or annuity
is maintained acquired such
account by reason of the death
of another individual, and
(II) such individual was not
the surviving spouse of such
other individual.
(D) Partial rollovers permitted.--
(i) In general.--If any amount paid
or distributed out of an individual
retirement account or individual
retirement annuity would meet the
requirements of subparagraph (A) but
for the fact that the entire amount was
not paid into an eligible plan as
required by clause (i) or (ii) of
subparagraph (A), such amount shall be
treated as meeting the requirements of
subparagraph (A) to the extent it is
paid into an eligible plan referred to
in such clause not later than the 60th
day referred to in such clause.
(ii) Eligible plan.--For purposes of
clause (i), the term ``eligible plan''
means any account, annuity, contract,
or plan referred to in subparagraph
(A).
(E) Denial of rollover treatment for required
distributions.--This paragraph shall not apply
to any amount to the extent such amount is
required to be distributed under subsection
(a)(6) or (b)(3).
(F) Frozen deposits.--For purposes of this
paragraph, rules similar to the rules of
section 402(c)(7) (relating to frozen deposits)
shall apply.
(G) Simple retirement accounts.--In the case
of any payment or distribution out of a simple
retirement account (as defined in subsection
(p)) to which section 72(t)(6) applies, this
paragraph shall not apply unless such payment
or distribution is paid into another simple
retirement account.
(H) Application of section 72.--
(i) In general.--If--
(I) a distribution is made
from an individual retirement
plan, and
(II) a rollover contribution
is made to an eligible
retirement plan described in
section 402(c)(8)(B)(iii),
(iv), (v), or (vi) with respect
to all or part of such
distribution,
then, notwithstanding paragraph (2), the rules
of clause (ii) shall apply for purposes of
applying section 72.
(ii) Applicable rules.--In the case
of a distribution described in clause
(i)--
(I) section 72 shall be
applied separately to such
distribution,
(II) notwithstanding the pro
rata allocation of income on,
and investment in, the contract
to distributions under section
72, the portion of such
distribution rolled over to an
eligible retirement plan
described in clause (i) shall
be treated as from income on
the contract (to the extent of
the aggregate income on the
contract from all individual
retirement plans of the
distributee), and
(III) appropriate adjustments
shall be made in applying
section 72 to other
distributions in such taxable
year and subsequent taxable
years.
(I) Waiver of 60-day requirement.--The
Secretary may waive the 60-day requirement
under subparagraphs (A) and (D) where the
failure to waive such requirement would be
against equity or good conscience, including
casualty, disaster, or other events beyond the
reasonable control of the individual subject to
such requirement.
(4) Contributions returned before due date of
return.--Paragraph (1) does not apply to the
distribution of any contribution paid during a taxable
year to an individual retirement account or for an
individual retirement annuity if--
(A) such distribution is received on or
before the day prescribed by law (including
extensions of time) for filing such
individual's return for such taxable year,
(B) no deduction is allowed under section 219
with respect to such contribution, and
(C) such distribution is accompanied by the
amount of net income attributable to such
contribution.
In the case of such a distribution, for purposes of
section 61, any net income described in subparagraph
(C) shall be deemed to have been earned and receivable
in the taxable year in which such contribution is made.
(5) Distributions of excess contributions after due
date for taxable year and certain excess rollover
contributions.--
(A) In general.--In the case of any
individual, if the aggregate contributions
(other than rollover contributions) paid for
any taxable year to an individual retirement
account or for an individual retirement annuity
do not exceed the dollar amount in effect under
section 219(b)(1)(A), paragraph (1) shall not
apply to the distribution of any such
contribution to the extent that such
contribution exceeds the amount allowable as a
deduction under section 219 for the taxable
year for which the contribution was paid--
(i) if such distribution is received
after the date described in paragraph
(4),
(ii) but only to the extent that no
deduction has been allowed under
section 219 with respect to such excess
contribution.
If employer contributions on behalf of the
individual are paid for the taxable year to a
simplified employee pension, the dollar
limitation of the preceding sentence shall be
increased by the lesser of the amount of such
contributions or the dollar limitation in
effect under section 415(c)(1)(A) for such
taxable year.
(B) Excess rollover contributions
attributable to erroneous information.--If--
(i) the taxpayer reasonably relies on
information supplied pursuant to
subtitle F for determining the amount
of a rollover contribution, but
(ii) the information was erroneous,
subparagraph (A) shall be applied by increasing
the dollar limit set forth therein by that
portion of the excess contribution which was
attributable to such information.
For purposes of this paragraph, the amount allowable as
a deduction under section 219 shall be computed without
regard to section 219(g).
(6) Transfer of account incident to divorce.--The
transfer of an individual's interest in an individual
retirement account or an individual retirement annuity
to [his spouse] the individual's spouse or former
spouse under a divorce or separation instrument
described in clause (i) of section 121(d)(3)(C) is not
to be considered a taxable transfer made by such
individual notwithstanding any other provision of this
subtitle, and such interest at the time of the transfer
is to be treated as an individual retirement account of
such spouse, and not of such individual. Thereafter
such account or annuity for purposes of this subtitle
is to be treated as maintained for the benefit of such
spouse.
(7) Special rules for simplified employee pensions or
simple retirement accounts.--
(A) Transfer or rollover of contributions
prohibited until deferral test met.--
Notwithstanding any other provision of this
subsection or section 72(t), paragraph (1) and
section 72(t)(1) shall apply to the transfer or
distribution from a simplified employee pension
of any contribution under a salary reduction
arrangement described in subsection (k)(6) (or
any income allocable thereto) before a
determination as to whether the requirements of
subsection (k)(6)(A)(iii) are met with respect
to such contribution.
(B) Certain exclusions treated as
deductions.--For purposes of paragraphs (4) and
(5) and section 4973, any amount excludable or
excluded from gross income under section 402(h)
or 402(k) shall be treated as an amount
allowable or allowed as a deduction under
section 219.
(8) Distributions for charitable purposes.--
(A) In general.--So much of the aggregate
amount of qualified charitable distributions
with respect to a taxpayer made during any
taxable year which does not exceed $100,000
shall not be includible in gross income of such
taxpayer for such taxable year.
(B) Qualified charitable distribution.--For
purposes of this paragraph, the term
``qualified charitable distribution'' means any
distribution from an individual retirement plan
(other than a plan described in subsection (k)
or (p))--
(i) which is made directly by the
trustee to an organization described in
section 170(b)(1)(A) (other than any
organization described in section
509(a)(3) or any fund or account
described in section 4966(d)(2)), and
(ii) which is made on or after the
date that the individual for whose
benefit the plan is maintained has
attained age 701/2.
A distribution shall be treated as a qualified
charitable distribution only to the extent that
the distribution would be includible in gross
income without regard to subparagraph (A).
(C) Contributions must be otherwise
deductible.--For purposes of this paragraph, a
distribution to an organization described in
subparagraph (B)(i) shall be treated as a
qualified charitable distribution only if a
deduction for the entire distribution would be
allowable under section 170 (determined without
regard to subsection (b) thereof and this
paragraph).
(D) Application of section 72.--
Notwithstanding section 72, in determining the
extent to which a distribution is a qualified
charitable distribution, the entire amount of
the distribution shall be treated as includible
in gross income without regard to subparagraph
(A) to the extent that such amount does not
exceed the aggregate amount which would have
been so includible if all amounts in all
individual retirement plans of the individual
were distributed during such taxable year and
all such plans were treated as 1 contract for
purposes of determining under section 72 the
aggregate amount which would have been so
includible. Proper adjustments shall be made in
applying section 72 to other distributions in
such taxable year and subsequent taxable years.
(E) Denial of deduction.--Qualified
charitable distributions which are not
includible in gross income pursuant to
subparagraph (A) shall not be taken into
account in determining the deduction under
section 170.
(9) Distribution for health savings account
funding.--
(A) In general.--In the case of an individual
who is an eligible individual (as defined in
section 223(c)) and who elects the application
of this paragraph for a taxable year, gross
income of the individual for the taxable year
does not include a qualified HSA funding
distribution to the extent such distribution is
otherwise includible in gross income.
(B) Qualified HSA funding distribution.--For
purposes of this paragraph, the term
``qualified HSA funding distribution'' means a
distribution from an individual retirement plan
(other than a plan described in subsection (k)
or (p)) of the employee to the extent that such
distribution is contributed to the health
savings account of the individual in a direct
trustee-to-trustee transfer.
(C) Limitations.--
(i) Maximum dollar limitation.--The
amount excluded from gross income by
subparagraph (A) shall not exceed the
excess of--
(I) the annual limitation
under section 223(b) computed
on the basis of the type of
coverage under the high
deductible health plan covering
the individual at the time of
the qualified HSA funding
distribution, over
(II) in the case of a
distribution described in
clause (ii)(II), the amount of
the earlier qualified HSA
funding distribution.
(ii) One-time transfer.--
(I) In general.--Except as
provided in subclause (II), an
individual may make an election
under subparagraph (A) only for
one qualified HSA funding
distribution during the
lifetime of the individual.
Such an election, once made,
shall be irrevocable.
(II) Conversion from self-
only to family coverage.--If a
qualified HSA funding
distribution is made during a
month in a taxable year during
which an individual has self-
only coverage under a high
deductible health plan as of
the first day of the month, the
individual may elect to make an
additional qualified HSA
funding distribution during a
subsequent month in such
taxable year during which the
individual has family coverage
under a high deductible health
plan as of the first day of the
subsequent month.
(D) Failure to maintain high deductible
health plan coverage.--
(i) In general.--If, at any time
during the testing period, the
individual is not an eligible
individual, then the aggregate amount
of all contributions to the health
savings account of the individual made
under subparagraph (A)--
(I) shall be includible in
the gross income of the
individual for the taxable year
in which occurs the first month
in the testing period for which
such individual is not an
eligible individual, and
(II) the tax imposed by this
chapter for any taxable year on
the individual shall be
increased by 10 percent of the
amount which is so includible.
(ii) Exception for disability or
death.--Subclauses (I) and (II) of
clause (i) shall not apply if the
individual ceased to be an eligible
individual by reason of the death of
the individual or the individual
becoming disabled (within the meaning
of section 72(m)(7)).
(iii) Testing period.--The term
``testing period'' means the period
beginning with the month in which the
qualified HSA funding distribution is
contributed to a health savings account
and ending on the last day of the 12th
month following such month.
(E) Application of section 72.--
Notwithstanding section 72, in determining the
extent to which an amount is treated as
otherwise includible in gross income for
purposes of subparagraph (A), the aggregate
amount distributed from an individual
retirement plan shall be treated as includible
in gross income to the extent that such amount
does not exceed the aggregate amount which
would have been so includible if all amounts
from all individual retirement plans were
distributed. Proper adjustments shall be made
in applying section 72 to other distributions
in such taxable year and subsequent taxable
years.
(e) Tax treatment of accounts and annuities.--
(1) Exemption from tax.--Any individual retirement
account is exempt from taxation under this subtitle
unless such account has ceased to be an individual
retirement account by reason of paragraph (2) or (3).
Notwithstanding the preceding sentence, any such
account is subject to the taxes imposed by section 511
(relating to imposition of tax on unrelated business
income of charitable, etc. organizations).
(2) Loss of exemption of account where employee
engages in prohibited transaction.--
(A) In general.--If, during any taxable year
of the individual for whose benefit any
individual retirement account is established,
that individual or his beneficiary engages in
any transaction prohibited by section 4975 with
respect to such account, such account ceases to
be an individual retirement account as of the
first day of such taxable year. For purposes of
this paragraph--
(i) the individual for whose benefit
any account was established is treated
as the creator of such account, and
(ii) the separate account for any
individual within an individual
retirement account maintained by an
employer or association of employees is
treated as a separate individual
retirement account.
(B) Account treated as distributing all its
assets.--In any case in which any account
ceases to be an individual retirement account
by reason of subparagraph (A) as of the first
day of any taxable year, paragraph (1) of
subsection (d) applies as if there were a
distribution on such first day in an amount
equal to the fair market value (on such first
day) of all assets in the account (on such
first day).
(3) Effect of borrowing on annuity contract.--If
during any taxable year the owner of an individual
retirement annuity borrows any money under or by use of
such contract, the contract ceases to be an individual
retirement annuity as of the first day of such taxable
year. Such owner shall include in gross income for such
year an amount equal to the fair market value of such
contract as of such first day.
(4) Effect of pledging account as security.--If,
during any taxable year of the individual for whose
benefit an individual retirement account is
established, that individual uses the account or any
portion thereof as security for a loan, the portion so
used is treated as distributed to that individual.
(5) Purchase of endowment contract by individual
retirement account.--If the assets of an individual
retirement account or any part of such assets are used
to purchase an endowment contract for the benefit of
the individual for whose benefit the account is
established--
(A) to the extent that the amount of the
assets involved in the purchase are not
attributable to the purchase of life insurance,
the purchase is treated as a rollover
contribution described in subsection (d)(3),
and
(B) to the extent that the amount of the
assets involved in the purchase are
attributable to the purchase of life, health,
accident, or other insurance, such amounts are
treated as distributed to that individual (but
the provisions of subsection (f) do not apply).
(6) Commingling individual retirement account amounts
in certain common trust funds and common investment
funds.--Any common trust fund or common investment fund
of individual retirement account assets which is exempt
from taxation under this subtitle does not cease to be
exempt on account of the participation or inclusion of
assets of a trust exempt from taxation under section
501(a) which is described in section 401(a).
(g) Community property laws.--This section shall be applied
without regard to any community property laws.
(h) Custodial accounts.--For purposes of this section, a
custodial account shall be treated as a trust if the assets of
such account are held by a bank (as defined in subsection (n))
or another person who demonstrates, to the satisfaction of the
Secretary, that the manner in which he will administer the
account will be consistent with the requirements of this
section, and if the custodial account would, except for the
fact that it is not a trust, constitute an individual
retirement account described in subsection (a). For purposes of
this title, in the case of a custodial account treated as a
trust by reason of the preceding sentence, the custodian of
such account shall be treated as the trustee thereof.
(i) Reports.--The trustee of an individual retirement account
and the issuer of an endowment contract described in subsection
(b) or an individual retirement annuity shall make such reports
regarding such account, contract, or annuity to the Secretary
and to the individuals for whom the account, contract, or
annuity is, or is to be, maintained with respect to
contributions (and the years to which they relate),
distributions aggregating $10 or more in any calendar year, and
such other matters as the Secretary may require. The reports
required by this subsection--
(1) shall be filed at such time and in such manner as
the Secretary prescribes, and
(2) shall be furnished to individuals--
(A) not later than January 31 of the calendar
year following the calendar year to which such
reports relate, and
(B) in such manner as the Secretary
prescribes.
In the case of a simple retirement account under subsection
(p), only one report under this subsection shall be required to
be submitted each calendar year to the Secretary (at the time
provided under paragraph (2)) but, in addition to the report
under this subsection, there shall be furnished, within 31 days
after each calendar year, to the individual on whose behalf the
account is maintained a statement with respect to the account
balance as of the close of, and the account activity during,
such calendar year.
(j) Increase in maximum limitations f